If you are looking for a mortgage and you have a payday loan, you may find it difficult – but not impossible – to get approved for a mortgage. Let’s look at what payday loans are and why some mortgage lenders may decline your application if you have one of these loans.
The attraction of payday loans
Payday loans are popular in some quarters because they offer the chance to borrow sums of between £50 and £2,000. The repayment period is short – typically the next month, or next payday, hence the name. Loans can be arranged at very short notice, invariably online.
Even if you have a poor credit rating, you may still be approved for a payday loan – and you rarely have to wait any time at all before receiving the cash.
No questions are asked about why you need to borrow the money and there is no restriction on how you choose to spend it.
According to a report by the Financial Ombudsman Service on the 12th of June 2020, the complaints it receives about payday loans fall into two broad categories:
- the loans are unaffordable, and the lender was irresponsible in lending at such a high rate of interest; and
- when borrowers get into financial difficulties and cannot afford to repay their loans, they often feel they are being treated unfairly by the lender.
This is supported by the Hampshire Police Federation which also pointed out the distinct drawbacks – not to mention dangers – in using payday loans.
The first is the high cost of such borrowing – the APR on a payday loan is commonly greater than 1000%.
There is also the so-called “payday loan trap” where the borrower encounters difficulties in making a payday loan repayment so takes out a further payday loan to cover that repayment – and so on to a vicious downward spiral.
The third danger – and one of particular relevance to anyone looking to apply for a mortgage in the near future – is the effect of payday borrowing on your credit record.
A mortgage with pay day loans
It might be tempting to imagine that borrowing a payday loan can only be good for your credit rating. It gives you the chance to demonstrate that you can handle debt and make your repayments on time and in full. Surely that scores well on your credit record?
The credit reference agency Experian does, indeed, confirm that if you repay your payday loan on time and in full, that alone will not damage your credit rating.
Even if there is no obvious damage to your credit rating however, some mortgage lenders may view payday loans in a less than favourable light. They may consider that payday loans are only taken as a last resort when someone is facing urgent difficulties in making ends meet and are forced into accepting a short-term loan at a painfully high rate of interest.
In those circumstances, and for those mortgage lenders, the fact that the payday loan was repaid on time is less important than the fact that the borrower needed to take it in the first place. Those lenders explicitly state that they will not entertain mortgage applications from those who have taken payday loans in the recent past.
Rejection is by no means assured if you have recently taken a payday loan, however. Some lenders recognise that there is a place for that sort of borrowing and that you may have demonstrated financial responsibility in repaying the loan.
Nevertheless, the reservations about your having needed to take a payday loan may be reflected in the reduced size of the mortgage you are offered or the fact that you may need to pay a less favourable market rate. Much may depend on how long ago you last resorted to a payday loan, when you repaid it, the amount you borrowed, and how often you have arranged a payday loan.
Alternatives to the payday loan
If there is any possibility that you may be looking to arrange a mortgage in the near future, therefore, you might want to avoid any unnecessary difficulty or disadvantage by considering the alternatives to payday loans:
- by selling something you own;
- cutting back on your weekly expenditure;
- borrowing instead from friends or family;
- asking for greater leeway in the repayment of existing debts or loans; and
- considering alternative sources of credit, such as personal loans or even your credit card.
Although payday loans do not rule out the chances of your getting a mortgage, they are certainly likely to limit your choice of lenders and may leave you with a less favourable deal in terms of the size of the mortgage you get and the rate of interest you need to pay. The good news is that specialist mortgage brokers can help find you the most appropriate payday loan mortgage by matching you to sympathetic lenders.