Every day we are approached by mortgage applicants who, at one point in their lives might have seen an advert on TV for a handy solution to a short-term cash problem: The Payday Loan. It might have only been for £50 and paid off within 30 days or even 1 week, nothing to worry about surely?
Payday loans reduce your chances of getting a mortgage
Unfortunately, what the Payday loan companies don’t always tell you is that even taking out the minimum amount and paying it back on time you leave a black mark on your credit report. Many UK banks and lenders will decline a mortgage application if they see that there is a Payday loan anywhere on your credit file.
This could be several years later. Everything else on your credit file could be perfect and then out of the blue, you are declined on your mortgage application because of that Payday loan you took out 5 years ago.
It is already a struggle for First Time Buyers to get on the property ladder and with the explosion of Payday loans popularity, it will become increasingly more difficult. Our advice is to avoid Payday loans completely if you can.
The problem is that Payday loan funds are so easily accessible (often within minutes) and most people think that they are just another typical loan. Payday loans are not currently classed in the same category as long-term personal loans with the mortgage lenders.
Lenders that can help if you have taken out Payday loans
I must stress that there are mortgage lenders out there that can help with Payday loans in the background, but some of the top lenders with the top interest rates will often say no. We will be able to look at your personal circumstances if you send us your credit report to work out which lenders can help.
There are specialist lenders that can help for sure, but also some Building Societies and a few high street lenders. Our mortgage brokers will be able to assist with an assessment without charge to find the right mortgage lender for you without approaching these lenders directly.
What needs to change in the industry?
Two things need to change:
1. Mortgage lenders need to observe and credit those Payday loans that were taken out sensibly and repaid. At the moment, Payday loans are being considered in the same light as credit agreement defaults and applicants are just being dismissed by the lenders without even exploring the details as to why the Payday loan was taken out in the first place.
2. The Payday loans companies must make more of an effort to explain to their customers that taking out a Payday loan will affect their chances of being accepted for a mortgage. There are currently no FCA regulations in place for Payday loan firms to alert the customer on (or before) application as to the impact that their service could have on a future mortgage application.
Article was written by Ben, Glow Mortgage Advisor (CeMAP, BSc Hons)
First Published on: 3rd July 2017
Last Updated: 27th November 2017