Research carried out for BBC’s Newsnight found that two thirds of mortgage brokers have had clients whose mortgage applications have been turned down because they’ve had a payday loan in the past.
The main reason for this is that a payday loan often signifies that a person has had problems managing their money in the past and this can act as a warning light to mortgage providers. Even if your finances are healthy now and you have a secure income, the fact you’ve had to turn to a payday loan before could be interpreted by lenders that you are a person who potentially lives beyond their means and struggles to manage their money. As a result, they’ll regard you as a higher risk borrower and may not want to lend to you in case you run into problems again in the future and are unable to keep up with your mortgage payments.
David Hollingworth at mortgage broker L&C Mortgages, said: “Not many lenders will state in their criteria that they won’t accept people who have used payday loans, but they certainly don’t like them. They are just one of the things that gets picked up when assessing a mortgage application.
“The use of payday loans points to an unstable financial situation, and is indicative of a poor credit position. Most lenders would probably say that they’d still consider an application from someone who’s had a payday loan – but it could be the straw that breaks the camel’s back in terms of the application being accepted.”
If you are thinking of taking out a payday loan, don’t act impulsively. They may offer a way of getting quick access to money, which can ease an immediate cash flow problem, but the longer term ramifications shouldn’t be overlooked.
Payday loans are designed for short-term borrowing – the money you borrow must be repaid the following month. However, many of those who take them out can’t afford to repay them – after all if you borrow £100 this month, you’ll have to pay back £130 next month and if money is short, you’re unlikely to have that spare.
As a result, millions of people end up taking another loan to either repay the first, or they incur additional charges from the original loan provider making it even harder to get the debt paid off. With this in mind, it’s easy to see how many of those who take out a payday loan find themselves sucked into a spiral of debt that takes them years to get out of.
David Rodger, chief executive of the Debt Advice Foundation said: “We rarely find people are dealing with just one payday lender when they come to us for advice – they will have outstanding loans with five or six, some of them from the same parent company. They are remorselessly encouraged to take out a new loan if they haven’t been able to keep up payments on their first one – bombarded with texts and emails about the outstanding debt and with offers of new loans as a so-called solution.”
Even if you are able to pay your payday loan off on time and never need another one, it could affect your ability to get other forms of credit in the future. And it’s not only getting a mortgage that could be a problem – you may find you struggle to get other forms of credit such as standard personal loans, credit cards and even things like car finance or mobile phone contracts.
Experts say this can be a problem for people who have taken a payday loan out within the last 12 months. After that period of time, and assuming you have not defaulted on any other loan or credit repayments, it shouldn’t impact your ability to borrow. However, all lenders have different underwriting criteria, so it may depend on what product you are applying for and from which provider.
So what are the alternatives?
It is often easier said than done, but if you can foresee that you’ll be short of cash, planning ahead could negate the need for a payday loan.
The simplest thing to do is speak to your bank to see if you can get an overdraft, or extend your existing overdraft. It’s important not to go over your overdraft limit without permission though as, like a payday loan, the cost of that can be exorbitantly expensive.
Also, consider a credit card or standard personal loan. If you have had problems managing credit in the past you won’t qualify for the leading rates, but there are credit cards and loans available to those with poor credit ratings. The interest rate will be higher than average, but this will still be a cheaper option than taking a payday loan.
Another option worth looking into is a loan from a credit union. Credit unions are not-for-profit financial cooperatives set up by members with something in common. For example, they might live in the same town or work in the same industry. They offer products such as loans and savings accounts and often people find they are able to borrow from their local credit union even if their bank has turned them down.
Don’t be afraid to seek help
If you are struggling to make ends meet and feel that a payday loan is your only option because you already have other debts and are maxed out on your credit card, speak to one of the debt charities such as Step Change, Debt Advice Foundation, the Citizen’s Advice Bureau or National Debtline. They will give you free advice and help you out of your current situation.
Learn more about payday loans at our dedicated hub.