Are you a loan stacker? Here's how to break the cycle

If you weren’t able to cover the balance owing on your credit card in January, or perhaps you’d like to borrow money for an upcoming investment, chances are you’re looking for a more efficient way to borrow.  One option that some people choose is called Loan Stacking. But this can create some big challenges and comes at a price. What is loan stacking? 

According to Bloomberg, loan stacking is a growing trend (personally and with small businesses).  where you’ve got multiple styles of loans from different vendors all with varying interest rates - credit card balances, payday loans, personal loans, consolidation loans, lines of credit, even investment loans for RRSPs. It feels like a spider web of debts and unfortunately, loan stacking tends to be a result of not being strategic about what you borrow for, and from which lender. The challenge for Canadians is if you’re juggling more than three types of consumer debt or business loans (not a mortgage), you’re likely paying too much interest, which makes it hard to pay down.

Who are the most common loan stackers and why?Repeat over spenders. Statistics indicate that if you’ve consolidated your debts once before because of overspending, you’ll be likely to do it again if you don’t correct the underlying behaviours. In a recent survey conducted by LoansCanada.ca , nearly 40 per cent of respondents — all of whom were repeat over spenders — skipped out on comparing offers from lenders. This makes matters worse. Circumstantial loan stackers include:

New parents. Taking time off for 12 to 18 months to care for a new baby is expensive. Many families loan stack to keep up with the bills, in anticipation that once both parents are back to work full time, they can clear it off.

Small business owners. When business is slow, or you're just launching, you’ll borrow money from just about anywhere. It’s worse for new small businesses who need a few years to establish themselves, and their credit, before they’ll qualify for lower cost loans. 

New graduates. If you're starting out and having a tough time finding a good paying job, you might be using debt to cover the costs of establish yourself post graduation. 

People on fixed-income. When your costs are growing, but your income is not, people turn to loan stacking to make ends meet.

What are the solutions?Long-term, you’ve got to break free from loan stacking by consolidating (as soon as you’re able), and then clearing that balance. Popular methods for individuals are a HELOC, refinancing a mortgage or a basic consolidation loan. For small businesses, look into local start-up funders or an operating line of credit. Whatever you do here, negotiate the rate!All the loan stackers out there need a budget. In the recently published 2019 Canadian Financial Capability Survey (CFCS), stats show that budgeters are WAY more likely to keep up with debt, and ultimately get out of it. Use technology to help you!Financial innovations are helping Canadians with loan stacking. You can compare lenders in literally three clicks (popular sites are RateHub.ca, LoansCanada.ca, Mogo.ca) , you can track your budget online and you can make payments on your loans automatically. 

Final takeaways for loan stackersIn the short-term, you might need to loan stack to simply cover your costs and prevent negative ratings on your credit score. But, as you pay each off (highest interest rate first), you’ll have fewer and fewer to pay back. This will help improve your credit and should allow you to apply for a better long-term consolidated debt solution at a lower rate.

DISCLAIMER:  Thank you to Loans Canada for sponsoring this post. All opinions are our own.

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