Will Using Payday Loans Ruin Your Chances Of Getting A Mortgage? How lenders actually view short-term loans
There are many negative consequences of taking out a payday loan, including the high price you pay to borrow and the risk that you run the risk that the loan may not be repaid as planned, resulting in a spiral of debt.
Critics have alleged that the loans have another pernicious effect – preventing borrowers from taking out a mortgage.
Earlier this week, a BBC Newsnight study claimed that two-thirds of mortgage brokers said a client turned down a mortgage after a payday loan. This report prompted a response from payday lender Wonga that using his loans could even improve credit scores.
Risk: Taking out a payday loan carries a risk that you will be rejected for a mortgage, but it is by no means guaranteed.
So, will taking out one of these notorious short-term loans ultimately lead to rejection when you seek to step up the real estate ladder? This is Money asked a lender and broker what they think.
“We process payday loans like any other loan ”.
Halifax Construction Corporation, which is part of the Lloyds Group, says payday loans are treated the same as other forms of unsecured debt, such as personal loans or credit cards.
A spokesperson said: “We don’t differentiate between payday loans and other forms like personal loans, as long as you’ve managed them well.
“If you have loans outstanding with more than three months remaining, including payday loans, when you apply for a mortgage, they will be factored into an affordability assessment and therefore factored into a decision to pay. ready.
“Typically, payday loans are shorter term and therefore may not impact the decision, but if there are more than three months left at the time of application, that will be taken into account. This is alongside a standard scoring assessment.
Halifax suggested that anyone applying for a mortgage make sure they are paying off their credit card debt above their minimum payment and cancel any credit card accounts they don’t use. not.
Not the End of the World: David Hollingworth, of London & Country Mortgages.
It is also helpful to ensure that all invoices are up to date, as well as to ensure that you are on the voters list and that all debts are recorded in the correct current name and address. It would also be unwise to make a series of other credit applications in preparation for a mortgage application.
“You will be doing yourself a disservice, but neither is it a final rejection.”
David Hollingworth, Associate Director at London and Country Mortgages, says: “You will probably get a similar story from other lenders to the one in Halifax.
“Lenders don’t necessarily ban the use of payday loans, but on the other hand, there’s an increased risk of being turned down if you’ve used them historically.
“But it’s hard to know when someone has been rejected if it’s just payday loans, this could be just one of the many factors that have worked against an applicant when faced with the criteria. of a lender.
“Someone who uses them month after month can pay them off and not leave any late payments on their credit report, but that could be a sign to a lender that they can’t budget properly if they use them consistently -” therefore they do not show that they would be able to pay a mortgage.
“Each lender will have different scoring methods, so just because you can get turned down for one doesn’t mean you will be turned down for the others.
“I know some specialty lenders, like Kensington Mortgages, will reject people outright if they’ve had a payday loan in the past 12 months, and they’re very candid about it.
“At the end of the day, people using payday loans will be doing themselves a disservice in terms of mortgage applications, but you can’t go so far as to say they will be turned down in the whole market.
“There’s a big difference between someone who took out a payday loan over 12 months ago and someone who uses it month to month.
“There is no blanket ban on payday loans, but regular use will not be viewed favorably and that just might be the thing that breaks the application.”
IT MAY NOT BE THE LOAN THAT IS THE PROBLEM, BUT WHAT IT REPRESENTS
Risk: Payday loans carry greater risks that could put you in a position of rejection by lenders.
Adam Uren of This is Money says: It is important that the relationship between payday loans and mortgages is understood.
Payday loans have a shorter term and are faster and easier to obtain than other types of loans, so while banks may treat them the same as other forms of unsecured debt – only viewing them as negative if repayments are missed – taking out one or a bunch of them would be pretty much like you had taken out several personal loans in a short period of time.
You are unlikely to be accepted for so many personal loans during this period, so the frequency with which some payday borrowers take out the loans creates a higher risk that mortgage applications will be affected.
But a payday loan is not necessarily an obstacle to your real estate plans. A person who takes out a single payday loan and repays on time, but otherwise has a good borrowing history, stable income, and regular savings, is less likely to have that loan count against them.
Likewise, someone who may have used payday loans, perhaps a flurry of them a few years ago, only to then dramatically improve their fortunes, will find that their chances of getting a mortgage improve over time.
Problems will arise however for those who seemingly depend on payday loans for month to month getting.
While one can very well be contracted in need when an unforeseen bill arises, payday loans taken out regularly and recently at the time of application will simply show lenders that you are not in a position to adequately budget for your income. . And if you can’t do it, how can you make your mortgage payments?
And of course, as with any loan, late or missed repayments will most certainly be to your detriment and the risk is higher with payday loans because the periods in which you have to repay them are shorter and the costs much higher than that. you won’t. find on most other forms of unsecured debt.
Payday loans by themselves won’t prevent you from getting a mortgage, but the circumstances that accompany their use could very well do. Banks might consider them as one of the many symptoms of financial hardship faced by an applicant and dismiss them on that basis. The same could be said for those who live in their overdrafts.
Those who miss payments or live on a monthly payday loan scheme have something to worry about, while those who took out one in the 12 months prior to a mortgage application might be better served by waiting a little longer. long time.
If you can prove that you have a secure income, save regularly, and are a responsible borrower, then historical or parsimonious use of payday loans should become less of a problem for lenders. Improving your credit rating can help, too – with tips on how to do it here.
People who take out payday loans are more likely to have other debts and financial issues that could hamper them in the application process, which is why it is so difficult to say for sure that they lead to rejections. mortgage.
But it is clear that by their very nature – the cost, speed, ease and regularity with which they can be obtained – payday loans present a greater threat than other forms of credit of putting people in the limelight. situation where they would be rejected by lenders.
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