Loan Stacking: Here's What You Need to Know
Back in the day, taking out a loan meant that you’d have to actually visit a bank and sit in front of a loan officer. But today’s technology has resulted in high-speed online lending and an increasing problem: loan stacking. It’s become possible due to the practically instant approval of many loans, with applicants able to apply and be approved for multiple loans in only a matter of days, or even hours.
What is Loan Stacking?
Loan stacking is when a borrower takes out multiple loans from various lenders at the same time, usually with no intention of paying the loans back. As TransUnion notes, the number of timing of the applications renders this type of fraud nearly undetectable, with the quick submission of multiple applications taking advantage of routine delays between transactions and inquiries. Many online lenders only pull “soft” credit reports, which means they’re only looking at the potential borrower’s score without examining the number of applications or inquiries on their report.
The credit reporting agency also states that its data has found that stacked loans are four times more likely to be the result of fraudulent activity, with a study in 2015 revealing that they represented $39 million out of nearly a half-million-dollars in charge-offs.
How Loan Stacking Can Hurt Consumers and Businesses
Whether you’re an individual consumer or a business, even if you aren’t out to defraud the lender, loan stacking can harm your financial health by negatively impacting your ability to pay the debt back. Obviously, the more loans you have, the harder it is to cover the payments. It can put you into a negative debt cycle, taking out more loans to pay back the old loans. It can be difficult or even impossible to escape that horrific cycle of debt, often ending up with unmanageable repayment schedules and exorbitant interest rates.
What It’s Not
Some people have wondered if taking out a second mortgage or home equity line is a kind of loan stacking. If your home is worth, for example, $300K, and your current mortgage is for $300K (or more), you couldn’t get either as it’s not legal to use the same collateral for multiple loans without all parties being aware if it. If you were to let all parties known, whoever isn’t first in line to receive the collateral would never agree to it since the collateral isn’t yours.
This situation however, is perfectly legal. Say that you ask, “How much is my home worth?” and find out that it’s worth $300k and your current mortgage is for $200K. In that case you’d have $100K in equity and may be able to get a home equity line of credit or a second mortgage for $100K.