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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, and maybe even a few personal loans to take care of day-to-day needs. Often, there is nothing abnormal or suspicious about this, it is simply how the financial lives of most adults and businesses work.

However, having multiple loans at the same time becomes a problem when something called loan stacking occurs. Loan stacking is often considered to be a fraudulent activity. The idea is a consumer applies for many loans, from different lenders, all at the same time. With the plan to not pay any of them back or without notifying lenders of their pending loan applications.

What Is Loan Stacking?

Loan stacking is when a borrower applies for multiple loans all within a very short window of time. This typically occurs when a borrower can’t qualify for a loan that is large enough. Either because their credit or financial profile isn’t strong enough or because they already have too much debt. 

Because there are delays between applications, transactions, and credit inquiries that show up on credit reports, the lenders have no idea what is going on. 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.

Loan Stacking Examples

As discussed, loan stacking occurs when several loans are taken out at the same time or within a short period of time.

Example 1

Loan stacking occurs when you keep both loans and do not set off one loan with the other. 

For example, let’s say that you were approved for a $ 25,000 loan from Lender A and at the same time receive another loan from Lender B of $50,000. As a result of this, you are now under the burden of two loans and a larger sum of $75,000.

Example 2

John needs a loan of $25,000 to fund his small business. Unsure if his loan application with the bank would be approved, John decided to apply for a $25,000 loan with a credit union as well. To his surprise, both lenders approve the loan and now he has $50,000. Both loans have similar rates and terms. 

In this example, loan stacking occurred when he decided to keep both loans, which also generally occurs without the lenders’ knowledge. 

What Are The Risks Associated With Loan Stacking?

When it comes to loan stacking, unfortunately, there are many risks for the borrower, most of which they do not consider before stacking multiple loans. 

  • High risk of defaulting on loan payments. Juggling multiple loan payments every month can be stressful. Especially for consumers who turned to loan stacking because of strained finances. 
  • Violating your loan term. Some lenders do not allow you to add a new loan from a different vendor. They can include this restriction in the terms and conditions of the loan contract. They may require you to immediately pay back their loan if they find out that you are stacking loans.
  • More debt to manage. Taking out multiple loans means an increase in administrative work. If you forget to make a payment on time, there could be penalties resulting in financial loss.
  • Harder to access future financing and loans. A new lender will be reluctant to provide you with a loan if you are stacking loans. This is because the new loan will increase your financial burden. If you manage to get the loan, the interest rate will be very high with strict terms and conditions.
  • May lower credit scores. While all credit scores react differently, loan stacking may have a negative impact on your scores. Either from too many hard inquiries or if you’re unable to keep up with your payments.

How Loan Stacking Can Lead To Loan Rejection?

When subprime lenders have had issues with fraudulent loan stacking in the past, it can lead to the lender becoming apprehensive as to who they’re now lending to. 

For example, a subprime lender could pull an applicant’s credit report, see that they already applied or have other loans with other lenders, assume that they’re stacking fraudulently and deny their application. 

Alternative Options To Loan Stacking

As discussed, loan Stacking can easily result in the borrower falling into further debt while also affecting future borrowers’ ability to access financing. If you’re looking for additional funding for yourself, consider the following alternatives.

Ask Your Lender For More Money

If you have a long-term relationship with a lender, ask for an additional loan. This approach can be easier than looking for a new lender. You’ll likely need to explain your circumstances and the genuine need for another loan.

Usually, a lender can offer additional financing if you have paid back a major part of your first loan. Furthermore, your lender will probably want to see that you’ve been a responsible borrower and paid all installments on time.

Consider Refinancing 

If you’ve already paid down a significant amount of a current loan and you need access to more money, consider refinancing your first loan. When you refinance a loan, you’ll take out a large loan, pay off your first loan and then keep the remainder of the second loan to cover whatever new expenses you have. 

Choose A Loan Alternative

Rather than stacking your loans, consider applying for a credit card with a low-interest rate or a personal line of credit. These could be a better alternative as you only have to pay interest on the amount you use. Moreover, repayments are flexible, you only have to pay the minimum balance to avoid any penalties. However, it’s important to note that the remaining balance will continue to accrue interest until repaid. 

Borrow From Friends or Family

If you are in a position where your friends or family may have the financial ability to help you, then you may want to consider borrowing from them. Before asking, consider how much you really need to borrow. You’ll want to assess which one of your friends and family may have the financial ability to lend you money. A loan contract with repayment terms, such as the one you may sign with a lender may also serve as a safety net for both, and help avoid any emotional and financial stress between you two. 

Improve Your Financial And Credit Health 

If you’re thinking about loan stacking because you can’t get approved for a large enough loan, consider working on your financial and credit health first. The lower your overall risk, the more a lender will be willing to lend to you. 

You can reduce your risk by improving your credit through responsible debt payments. Once you’ve improved your credit, paid down any debt, and improved your finances, then re-apply for the loan you need.

Putting The Borrower First

It’s important to understand that while loan stacking may be tempting when you’re struggling financially, the negative outcomes always outweigh the momentary positive ones. In any case, if you choose to access further funding make sure you discuss it with your loan agent to ensure you are not breaching your contract. If you are struggling with large amounts of debt, there are several free credit and debt counselling services available to help you. 

Frequently Asked Questions About Loan Stacking

Can I lie about my debt on a loan application?

If you apply for multiple loans and intentionally fail to disclose your pending debt, this is called  “fraudulent” loan stacking. Often, borrowers who lie on their applications have serious debt problems and use false information to apply for many loans through multiple lenders with no intention of paying them back. This is unethical and in some cases illegal.  Moreover, in many cases, your loan contract will have specific regulations around loan stacking. If your lender were to find out about undisclosed multiple loans under your name, then your loan agreement may be annulled in which case you will be expected to repay your loan in full, immediately. 

What’s wrong with loan stacking?

Loan stacking has two major issues. The first issue is that some borrowers may use the stacking method to take advantage of the lending system, and the second issue is that often loan stacking leads to unmanageable debt for the borrower. 

Can a lender tell if you’re loan stacking? 

Unfortunately, it’s not necessarily easy for lenders to see if you’re loan stacking. A borrower’s activities may not be immediately detected as it can sometimes take several weeks for a lender’s information to be relayed to and received by either TransUnion or Equifax. This delay in information allows borrowers to apply and get approved for more loans than they’re truly capable of handling. For example, a borrower may be eligible for a $5,000 loan, but if they apply for a $5,000 loan with two lenders, they may be able to borrow from both lenders but may not be able to handle both loan repayments, plus interest. 
Priyanka Correia avatar on Loans Canada
Priyanka Correia

Priyanka Correia is a Marketing Coordinator and personal finance expert at Loans Canada. Priyanka completed her Bachelor's degree in Marketing at Concordia University and has published work that has been mentioned in various news media. She is passionate about money management and educating Canadian consumers about how to take control of their financial lives.

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