Will using payday loans ruin your chances of getting a mortgage? How lenders really view short-term loans. By Adam Uren 10:26 28 Nov 2013, updated 10:26 28 Nov 2013.
There are many negative consequences of taking a payday loan not least of which are the high price you pay to borrow and the risk you run that the loan can't be repaid as planned, causing debts to spiral. Critics have alleged that the loans have another pernicious effect - ruling borrowers out of taking a mortgage. Earlier this week a piece of research by BBC Newsnight claimed that two-thirds of mortgage brokers said they had a client turned down for a mortgage after a payday loan. That report sparked a response from payday lender Wonga that use of its loans could even improve credit scores.
Risk: Taking out a payday loan carries a risk you may be rejected for a mortgage, but it's by no means guaranteed. So, will taking out one of these notorious short-term loans ultimately lead to rejection when you look to get on the property ladder? This is Money has asked a lender and a broker what they think. 'We treat payday loans like any other loan'. Halifax Building Society. part of the Lloyds group, says that payday loans are treated in the same way as other forms of unsecured debt - such as personal loans or credit cards.
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A spokeswoman said: 'We do not differentiate between payday loans and other forms like personal loans, provided you have managed them properly. 'If you have any outstanding loans with more than three months left on them, including payday loans, when you apply for a mortgage, they will be considered in an affordability assessment and therefore factored into a decision to lend. 'Typically payday loans are shorter term so may not impact the decision, but if more than three months are left at time of application then it would be considered. This is alongside a standard scoring assessment. Halifax has suggested anyone applying for a mortgage should ensure they are paying off credit card debts at a level higher than their minimum payment and cancel any credit card accounts they don't use.
Not the end of the world: David Hollingworth, of London & Country Mortgages. Also useful is ensuring all bills are up to date, as well as ensuring you are on the electoral register and any debts are registered to the correct name and current address.
It would also be unwise to make a series of other credit applications in the run-up to applying for a mortgage. 'You won't do yourselves any favours, but it's not a definite rejection either'. David Hollingworth, associate director at London and Country Mortgages, says: 'You'd probably get a similar story from other lenders as you did from Halifax. 'Lenders do not necessarily prohibit the use of payday loans, but on the flip side there is an increased chance of being declined if you have been historically using them. 'But it's hard to know when someone has been rejected if it is down purely to payday loans, it could be just one of many factors that went against an applicant when put up against a lender's criteria. 'Someone who uses them month after month may be paying them off and not leaving any late payments on their credit record, but it could be a sign to a lender that they're unable to budget properly if they're constantly using them - so they're not demonstrating they'd be able to afford a mortgage.
'Each lender will have different scoring methods so the fact you may be declined for one doesn't mean you'll be declined for others. 'I know some specialist lenders, like Kensington Mortgages, will reject people outright if they've had a payday loan in the last 12 months, and they're very up-front about it. 'The bottom line is people using payday loans are not going to do themselves any favours in terms of mortgage applications, but you can't go as far to say they'll be declined across the whole market. 'There's a big difference between someone taking out a payday loan over 12 months ago and someone using them month-on-month. 'There's no blanket ban on payday loans, but regular use will not be looked on favourably and it could well be the thing that breaks the application. IT MAY NOT BE THE LOAN THAT'S THE PROBLEM, BUT WHAT IT REPRESENTS.
Risk: Payday loans carry greater risks that could put you in a position to be rejected by lenders. Adam Uren, of This is Money, says: It is important that the relationship between payday loans and mortgages is understood. Payday loans run over a shorter period and are quicker and easier to obtain than other types of loan, so while banks may treat them the same way as other forms of unsecured debt - only seeing them as a negative if repayments are missed - taking out a series of them would look much the same as if you'd taken out several personal loans in a short space of time. You'd be unlikely to be accepted for that many personal loans in that time period, so the frequency with which some payday borrowers take the loans creates a higher risk of mortgage applications being affected. But neither is a payday loan necessarily a barrier to your property plans. Someone who takes out a single payday loan and repays on time, but who otherwise has a good borrowing record, a steady income and regular savings, is less likely to have that loan count against them. Similarly someone who may have had history of using payday loans, maybe a flurry of them a couple of years back, only to have since significantly improved their fortunes, will find their prospects of getting a mortgage will get better and better as time goes on.
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Problems will arise however for those who are seemingly reliant on payday loans to get from month-to-month. While one may well be taken out in dire need when an unexpected bill hits, payday loans being taken out on a regular basis and recent to the point of application will just show lenders that you are not able to adequately budget your income. And if you can't do that, how can you meet your mortgage payments.
And of course as with any loan, late or missed repayments will most certainly count against you and the risk of this is higher with payday loans as the periods in which you have to pay them back is shorter and the costs much greater than you'll find on most other forms of unsecured debt. Payday loans themselves won't rule you out of getting a mortgage, but the circumstances that accompany their use very well could.
Banks could view them as one of many symptoms of the financial difficulties facing an applicant, and reject them on that basis. The same could be said for those who live in their overdrafts. Those who miss payments, or who live on a monthly diet of payday loans, have cause to worry, while those who have taken one out in the 12 months before a mortgage application may be better served by waiting a little longer.
If you can prove you've got a secure income, save regularly, and are a responsible borrower, then historic or sparing use of payday loans should become less of an issue for lenders. Improving your credit rating can also help - with tips on how to do this here. People who take out payday loans are more likely to have other debts and financial problems that would count against them in the application process, which is why it's so difficult to say definitively that they lead to mortgage rejections. But it can't be denied that by their very nature - the cost, speed, ease and regularity of which they can be obtained - payday loans carry a greater threat than other forms of credit of putting people in the position where they'd be rejected by lenders.