Mortgage blog: Why your payday loan may be bad news for your mortgage hopes
According to figures published in The Guardian in 2013, there were 8.2million payday loans taken out in the UK in 2011/12. It is now a multi-billion pound industry, giving millions of people access to small sums of money for short periods of time.
If you are considering taking a payday loan, however, a leading credit expert has warned that it may affect your ability to get a mortgage in the future. With home loan affordability checks set to get tougher this spring, keep reading to find out more about how a payday loan could scupper your chances of buying your dream home.
Payday loans could be bad news if you want a mortgage
According to the Office of Fair Trading the average payday loan amount is around £270 and customers pay, on average, around £25 for each £100 borrowed. And, a recent study by the Competition Commission revealed that half of payday loan customers take on further loans within a 30-day period.
Now, though, the head of consumer affairs at the credit reference agency Experian says that taking these loans could negatively impact on your ability to get a mortgage. James Jones says that in some cases, recent payday loans may fall foul of the "tougher affordability checks" that mortgage lenders are now enforcing
He adds: "We get lots of questions from customers about whether using payday loans will negatively impact their future credit rating. Anecdotal evidence from the lenders we work with suggests that taking out a payday loan and paying it back on time won't necessarily bar you from getting credit from banks and other lenders - but this will always depend on the policies of the particular lender making the assessment.
"However, homebuyers do need to be very mindful of the much tougher affordability checks that mortgage lenders are being required to carry out and how a very recent payday loan, however managed, might be viewed in this respect."
Missed payments will damage your credit rating
While a payday loan in itself might now be a reason for a lender to refuse your mortgage application, any issues with repaying your loan could be a problem.
Keith Osborne, editor of Whathouse.com, says: "From a mortgage lender's point of view, a payday loan will need to be dealt with as responsibly as a credit card or personal loan. If you have missed payments on your loan then this will adversely affect your credit rating which will have a significant impact on your ability to get a mortgage.
"Missing payments on your payday loan will not only result in higher interest costs and possible fees but it will also jeopardise your chances of getting a mortgage."
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