What is Loan Stacking?

What is Loan Stacking?

Written by Bryan Daly
Fact-checked by Caitlin Wood
Last Updated May 15, 2018

In this day and age, it’s not uncommon for Canadians to have multiple types of credit products listed on their credit report. Many borrowers have one or more credit cards, a car loan, a mortgage, maybe even a few personal loans to take care of. There is nothing abnormal or suspicious about this, it is simply how the financial lives of most adult Canadians work. 

When having multiple loans at the same time becomes a problem is when something called loan stacking occurs. Loan stacking is often considered to be a fraudulent activity where a consumer applies for many loans, from different lenders, all at the same time, with the plan to not pay any of them back.

How Does Loan Stacking Work?

Loan stacking works because fraudulent borrowers apply for these loans all within a very short window of time, this makes it almost impossible for the lenders to know what is going on. Typically, there are delays between applications, transactions, and credit inquiries what show up on credit reports. If one consumer applies for five loans all from different lenders within the same day, each lender will have no idea the others exist and will have no reason to be suspicious of the borrower.

The Problem with Loan Stacking   

Problems arise when some borrowers use the stacking method to take advantage of the lending system. Whatever their motivation might be, many borrowers have a number of credit products active through more than one lender. While this is fairly common, there are other situations in which a borrower’s intentions are definitely not lawful. Otherwise known as “fraudulent” stacking, those unlawful borrowers, who likely already have serious debt problems, use false information to apply for many loans through multiple lenders with no intention of paying them back. They may even be identity thieves using someone else’s personal and banking information. This is a particular problem for online-based lenders, who aren’t always able to properly identify their clients or report their activity to the credit bureaus in real time.

A Delay in Information

It can sometimes take several weeks for a lender’s information to be relayed to and received by either TransUnion or Equifax, giving a fraudulent borrower ample time to use up their ill-gotten loan money. And as we said, this isn’t just a problem for the lender. Fraudulent stacking also causes issues for legitimate potential borrowers who are just trying to get a loan for something that’s important to them. Many would-be borrowers, especially those who have bad credit, often have trouble qualifying through banks and other prime lenders. This is because the lending standards of prime lenders are more strict than those of subprime lenders, who generally cater to borrowers with bad credit. If a potential borrower’s credit isn’t above a certain level, a prime lender might deny their applications.  

Borrowers Are Affected Too

So, bad credit borrowers sometimes need subprime online lenders to gain access to various credit products. However, because of fraudulent stacking, they can now also have trouble qualifying with those same online lenders. If one of those lenders has had issues with fraudsters stacking loans in the past, it might make them more apprehensive as to who they’re now lending to. The legitimate borrowers who would have once qualified, even with poor credit, no longer qualify because the lender has raised their standards. In other cases, the subprime lender could pull their credit report when considering them, see that they already have other loans with other lenders, assume that they’re stacking fraudulently and deny their application. Since the level of risk that subprime lenders must assess has now increased, their lending policies become stricter and many legitimate potential borrowers could get declined.

Read this to learn what bad credit lenders look at when assessing loan eligibility.  

Now, this is not to say that all borrowers who have a stack of loans are scam artists. Many honest borrowers, small business owners for instance, often require multiple loans from numerous sources to deal with the large debts that come with running their own companies. However, fraudsters do certainly use the tactic of loan stacking for their own gain, which in turn puts stress on the lending market as a whole, making things harder for everyone else involved.

Putting The Borrower First

Unfortunately, fraudulent borrowers and those who choose to loan stack continue to make it more difficult for consumers who are truly looking for help and who need to turn to alternative lenders to get the loans and services they need. This is why it is so important that borrowers and lenders work together to make sure that all the necessary due diligence is performed. While credit checks and other forms of verification may take longer than you want or seem unnecessary, they are always in the best interest of everyone involved.

Rating of 5/5 based on 3 votes.

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and traveling the world in search of the coolest sights our planet has to offer. Bryan uses the BMO Cash Back Mastercard to earn cash back on everything from boring bill payments to exciting excursions. He is also a strong saver, holding both a TFSA and an RRSP account in order to prepare for his future while taking full advantage of tax benefits.

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