What we cover in this guide
- Can I get a Mortgage with a Payday Loan?
- Try our Bad Credit mortgage calculator
- What Is a Payday Loan?
- The Problem with Payday Loans and Mortgage Lenders
- Alternative Options to Payday Loans
- Can I get a Mortgage after a Payday Loan?
- What if I have other Adverse Credit Issues in Addition to a Payday Loan?
- How Serious are Payday Loans and Bad Credit for Mortgages?
- Do Payday Loans increase your Credit Score?
- Getting a Mortgage after Payday Loans FAQs
Can I get a mortgage with a Payday Loan?
The most helpful way to look at why a payday loan works against you is by doing some quick sums – bear with us!
By law, a lender must show the APR (annual percentage rate) of the interest that they will charge on the loan. If you take out a loan of £2000 with an APR of 20%, then over the course of a year you will pay back £2400 – the loan amount (£2000) plus 20% interest (£400). If you try to calculate what you’ll pay on a payday loan, you will quickly see the trap that you could fall into. Payday loans are supposed to be very short-term, and come with very high interest rates applied monthly, but for one reason or another, some people end up extending the loan for longer than one month.
Alternative options to payday loans
To make sure that payday loans do not become part of your life, or your credit history, it’s worth looking into all the alternative options to a short-term cash boost that could harm your credit score. Some of the ideas here are long-term, but all of them will help you engineer a situation where you’ll have no need to use a payday loan.
- Watch out for overspending – Take a look at all your outgoings and look for opportunities to save money. Maybe skip those daily ‘artisan’ coffees, pack a lunch rather than buying food all the time, cancel an unused gym membership or magazine subscription, cycle to work instead of using the car, go for ‘own brand’ options at supermarkets (they’re often made by the same people anyway)… the list goes on.
- Use credit cards less often, but more wisely – If money is short, resist the temptation to put more payments on your credit cards and add to your debts. If you’re paying off the minimum each month and interest is adding up, you are only setting up a trap for yourself in the future, especially when you hit your credit limit.The best thing to do is to try to pay off existing credit card debt (by adding a little extra on each payment if you can’t pay it all at once), so you save money on interest fees too, and then use your credit card for expenses that you know you will be able to repay in full at the end of each month. This will help to build a positive credit report, and you’ll have less financial liabilities as well.
- Find ways to increase your income – it may seem simplistic, but the most straightforward way to improve your cash flow and savings is to somehow increase your income. Could you take on some freelance work, or ask for some overtime? Perhaps you have things you can sell, or could start a sideline for specialist items on eBay? Or maybe you could find a second, part-time job, or perhaps push for a promotion or pay rise in your current work? Would a competitor (perhaps one closer to home) offer a better-paying position? There could be a few more options, but if you are able to increase your income remember not to also increase your spending accordingly. Use the extra money to pay off any debts or add to your savings – it might come in handy for a deposit.
What if I have other Adverse Credit issues in addition to a Payday Loan?
Lenders are always looking at their level of risk, and the more bad credit events you have on your file on top of a payday loan, the more difficult it will be to get accepted for a mortgage. Credit agencies might record details in different ways, but lenders will view payday loans in the same way they do default notices, CCJs and late or missed payments.
If you defaulted or extended the payday loan, then this will add to your issues – getting a mortgage with a combination of adverse credit events can be problematic. However, time is a factor, and the longer ago these events happened, the less weight they will carry with a lender’s decision on a mortgage, especially if you have had a healthy record since.
If you can demonstrate you have been a responsible borrower in more recent times, and your issues are in the past, you will be viewed more favourably by a lender, especially if you also have a decent deposit to put down.
Getting a Mortgage after Payday Loans FAQs
- How do payday loans work
- Can I get a payday loan with bad credit?
- Can I get a mortgage with a current payday loan?
- Can I get a mortgage with a history of payday loans?
- What do lenders class as a payday loan?
- Why do lenders dislike payday loans, even if they’ve been paid on time and in full?
- I’ve had a payday loan in the last 12 months - can I get a mortgage?
- Do payday loans affect credit score?
- What happens if you default on a payday loan?
The term ‘payday loan’ describes agreements that are usually used to bridge the gap in someone’s cash flow between now and the borrower’s next pay day when the loan can be repaid. It’s an arrangement that comes with a high interest rate, where you borrow a specific amount on a short-term basis, normally 12 months or less.
Yes, there are some lenders who will allow you to take out short-term payday loans when you have other bad credit. However it is quite a risky route to take and not recommended. You should take advice from an expert on your debts and how a payday loan might affect your credit score, in case you need to apply for a mortgage at a later date. Contrary to what some people have heard, taking out a payday loan and repaying it promptly will not help your credit rating.
Yes, you can, but it’s likely that your options will be limited. Lenders view payday loans on a borrower’s record as a red flag, as using them is a sign that you cannot live within your means or manage your money very well, and a high street mortgage lender will be likely to turn you down flat.
Specialist lenders may be willing to offer you a mortgage on reasonable terms, especially if your credit history is otherwise healthy and you don’t have too many commitments – but they may still not approve your application if the payday loan is still active or was in place during the last few months. Our team of specialist advisers will be able to tell you exactly where you stand.
Maybe, but it will depend on two things: the state of your credit report aside from the payday loan events, and the attitude of the lender. Some lenders will automatically decline an applicant with a payday loan showing on their record, while others will be more flexible, looking at the whole picture.
If payday loan usage is the only problem with your credit report, especially if it was not recent, then this will have a lot less impact than if the loans were within the last year and you also had late and/or missed payments on top. A payday loan will stay on your credit file for six years, and as more time passes, the less impact they have.
Payday loans are intended to be quick, short-term loans to cover a shortfall in cash flow for a very limited period of time, usually in the case of an emergency like a boiler failure or car breakdown, until the borrower’s next pay cheque comes through. They are usually very expensive and need to be paid back, with interest, at the end of a month, although people have been known to extend them for longer periods up to twelve months. Lenders will recognise them on your credit report as ‘advance against income’ or ‘revolving credit’, and if the name of the payday loan lender (like Wonga or PaydayUK) also appears, then that in itself can ring alarm bells.
The loan itself is not the issue – it’s just using a credit facility similar to any other – but the circumstances that usually occur around payday loans are a problem for lenders. They see their use as an indicator that someone is not able to manage their money effectively. As ever, though, these things come in degrees. If you took out one payday loan a few years ago because you had no other option when your boiler needed to be replaced, and everything else on your credit report is squeaky clean, then it will not have much, if any, impact on your credit rating. But if you have needed to take out a string of payday loans – even if you paid them off on time and in full – it shows regular poor money management and lenders will perceive you as being a bad credit risk.
It should be possible, but unlikely from a high street lender. Payday loans are viewed on credit reports as adverse credit events like missed payments or defaults. If you also have other black marks on your file, and a deposit of 10% or smaller, then your chances will be further reduced. But if everything else on your credit file is healthy, and you have a reasonable sum to put down for a deposit, then you outlook is a lot better. Our specialist advisers will be able to let you know exactly what your options are.
Unfortunately yes, they do. Lenders view payday loans in the same way as they would missed payments or defaults, and taking out any kind of short-term loan on a regular basis could damage your credit rating. Some mortgage lenders now have set criteria for the amount of payday loans over the last six years they will permit to see on an applicant’s credit report.
Like any other loan, defaulting on a payday loan will be noted on your credit reports. As this will continue to show up on your credit file for the next six years, the default will likely have an impact on your future borrowing applications during this period.