Mortgage After Payday Loans
You might think that using further lines of credit that you are able to pay back promptly and on time would help your credit score – and, in general, you would be right. However, with payday loans this is definitely NOT the case!
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- 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
Payday loans might be a short-term solution to an immediate need, or provide a quick financial boost, but in the long-term they are never a good idea. The reason for this is that interest rates on payday loans are typically very high, so if you are unable to pay off the loan on time, costs can quickly escalate, and there is a greater risk of you accruing more debt that you may not be able to afford.
Payday loans are also a red flag to lenders, who recognise them as a last-resort borrowing option, and therefore a sign that you are unable to manage money very well or live within your means. Steer away from them if you can.
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.
Mortgage Affordability
- What mortgage can I get with my salary?
- What stops you getting a mortgage?
- Can I get a low income mortgage?
- What to do if you can’t afford a mortgage
- What is the longest mortgage term in the UK?
- A guide to bank statements for mortgage applications
- Obtaining a Joint Borrower, Sole Proprietor Mortgage
- Try the mortgage affordability calculator
What is a Payday Loan?
If, for whatever reason, you’re in a hurry for money to cover an unexpected emergency expense, or perhaps a lot of payment demands have come through around the same time and you need a quick boost to your cash reserves, then you may be tempted to take out a payday loan. This is intended to be a quick, convenient, short-term loan that will tide you over, enabling you to meet your essential household spending (e.g. rent, groceries or overdue bills) until you have the finances to cover the outlay from your regular income. You can find outlets offering payday loans on a number of high streets, or several companies operate online.
Situations when one might be necessary usually arise when it’s been a while since your last pay transfer and your next one is imminent but just too many days away for the expense. Hence the term ‘payday loan’ derives from the time when you could expect to pay the loan back. It’s also a sign you have no other reserves to call on, like savings for example, and are not able to get help from family, friends, employers or your bank, so a payday loan is the only means for you to stay afloat.
However, their convenience comes at a high price. Interest rates on payday loans are typically far greater than you would expect for a personal bank loan or even the most expensive credit cards – if taken over the course of a year, the API would be a whopping 800 – 1500% (compared to 28 – 30% for many credit cards). Thankfully, the FCA imposed new rules capping the amount repayable on a payday loan at twice the sum originally borrowed. A payday loan really is, for many people, the last resort to keep their household going.
The high interest rates are a reflection of why payday loans were originally created – as a very short-term stop-gap measure that you would expect to pay off fairly quickly after a few days – and gave the lender a reasonable remuneration for this service. However, it’s now possible to extend some payday loan arrangements for up to three months, with the danger of interest spiralling up beyond what the borrower will be able to repay.
In our advice to people who are seeking to repair their credit score, we recommend taking out a new line of credit and making prompt repayments before costs accrue in order to build up a record of responsible borrowing. Payday loans do not fit into this bracket. Due to their last-resort nature and high costs, mortgage lenders view them as a sign of desperation and an indication that you often find it difficult to live within your means. Therefore, a payday loan on your credit record will act as a red flag during any credit checks and could damage your chances of being granted a mortgage.
We would advise you to avoid payday loans at all costs, and, if you must use one, to pay it off in full as soon as possible to avoid excessive charges and the risk of snowballing costs. They are very rarely the only option available, and you could find a far better alternative by talking to an experienced and sympathetic loan advisor.
The problem with Payday Loans and mortgage lenders
The problem is down to why people take out payday loans in the first place. If you take out finance to buy a car, and pay the loan back in prompt instalments over the course of two or three years as agreed, then this demonstrates you can budget, plan and manage your expenses against your income.
However, if you take out a payday loan, it is seen as a sign that you have become desperate for funds and are not able to manage your money. Paying it back on time as agreed might help your status in the eyes of another credit lender, but this is not the case with mortgage lenders. Home loan providers apply their own criteria to applications and your credit history, and seeing a payday loan on your report will be a red flag to them.
The purpose of payday loans was to enable people access to money very quickly when they needed it. Borrowing money in this way might have been unavoidable or for reasons beyond your control, but a lender would view this as a sign that you had no contingency plan, and therefore were in a weak financial position. This does not inspire them with confidence to lend you money.
As a higher lending risk, you will be viewed as someone who may not be able to make their mortgage repayments in full or on time, which is why it will negatively impact your credit rating, and ultimately affect your application for a mortgage.
Our advice is to always avoid taking out payday loans, and to take steps to put things in place so that you never need to think about resorting to them. This will go a long way to showing mortgage lenders that you are responsible with money, and able to plan ahead for the unexpected.
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 side-line 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.
Can I get a mortgage after a Payday Loan?
The short answer is yes, you can, but other factors will come into play. Not least among these is time – how long it has been since you needed to use a payday loan will have an effect on your credit score. As mentioned before, the older the bad mark on your credit history, the less weight they will carry with any decisions by a lender, with all adverse credit events dropping off your history after six years. This is true for all kinds of bad credit events, from CCJs (County Court Judgements) to discharged bankruptcies, default notices and IVAs (Individual Voluntary Arrangements).
Different lenders will take a different attitude towards payday loans, with some declining an application from an individual who has used one only recently, while others will turn down anyone who has used payday loans at all.
However, it’s important to remember that, while having a payday loan on your credit report might affect your options, it’s still generally possible to get a mortgage. Lenders will take other factors into account, such as the loan-to-value (LTV) ratio you need and the result of an affordability assessment.
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.
How serious are Payday Loans and Bad Credit for mortgages?
It can affect home buyers from all ends of the spectrum – experienced landlords with multiple properties to first-time buyers trying to start their life on the property ladder. Bad credit issues and payday loans can make it much more difficult to get approved for the mortgage that you need. High street lenders are very cautious about who they lend to, and for applicants with any adverse events on their credit report, a payday loan will only make matters worse.
This is a very unfortunate situation, which you may have stumbled into through no fault of your own, or even thought that a payday loan could help your credit score. Either way, if you are looking for a mortgage with a payday loan on your record, then you need to look at options beyond the high street lenders.
If you talk to our expert team, we should be able to find the right lender with the right product to suit your needs – all the lenders we deal with make assessments based on your whole credit history, not an isolated incident.
The first thing to do is always to get a copy of your credit report to see exactly where you stand and where any issues might lie. Then you can take steps to build a healthier credit record using the tips we have posted. And you can talk also talk to an experienced bad credit mortgage advisor, who should be able to put you on the right track.
Do you already have a copy of your credit report? The get in touch with our team as soon as possible.
Do Payday Loans increase your Credit Score?
You may well be aware of the high interest rates charged by payday loan companies and their stringent terms. And you may also have used to think that taking out a payday loan could help your credit score. The unfortunate truth is it will not, and in fact can cause damage to your credit rating.
Just one small payday loan that you repaid promptly may not in itself have a big impact on your credit score, especially if it was a few years ago, but they are almost never seen as a positive sign. No matter how small the loan, or tiny the effect on your credit rating, for many lenders it is simply a matter of perception.
Many lenders are wary of applicants who have used payday loans in the past, as it implies they are not very good at managing their money, and this will cause them to decline your mortgage application. From experience, we must strongly advise clients to avoid taking out payday loans, especially if they are concerned about the impact on future mortgage applications they may need to make.
Getting a Mortgage after Payday Loans FAQs
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 advisors 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 advisors 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.
Phil Scott
Director
About the author
Phil has worked in the financial services industry since 1992, having started with a large insurance company. He went self employed in 1996 as an Independent Financial Adviser before setting up his first company, Needham Market Home Financial in 1999.
After four years, he decided to concentrate solely on mortgages and related insurances, and The Mortgage Centres was born. Since then, Phil has been influential in the opening of several new offices as the business continues to grow.
Qualifications
Financial Planning Certificate: 1, 2 & 3 | Year Attained: 1992
Certificate in Mortgage Advice and Practice (CEMAP) | Year Attained: 2001
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