Payday loans won’t directly affect your mortgage or remortgage application, but if you’ve taken one out in the last six years, then lenders may become warier of you and this could lead towards your mortgage application being rejected.
Here’s how it works…
The effect of a payday loan on your credit ratingEvidence of your payday loan will stay on your credit file for six years, which is one reason why the Financial Conduct Authority (FCA) has called for lenders to prominently display warnings like this in their advertisements:
‘Warning: late repayment can cause you serious money problems.’
Some payday loan companies argue that if you make the required payments on time and in full, then it can improve your credit rating.
However, your lender won’t assess your mortgage application solely on your credit rating - they’ll have their own criteria too, and are likely to recognise payday loans as indicators of financial difficulties.
The effect of a payday loan on your mortgageIf a payday loan sits alongside other ‘flags’ like late payments on your record or other accounts being run up to or over their limits then it could lead to your mortgage application being rejected.
If your application is otherwise as healthy as can be, then it’s unlikely a lender will dismiss you purely on the basis of one payday loan - but it’s not out of the question.
In a nutshell, it’s best to avoid applying for any form of credit in the six-months (arguably 12 months) prior to your mortgage application - especially high-interest forms such as payday loans.
Here’s how our Head of Communications, David Hollingworth sees it:
“Payday loans may seem like a quick, easy and harmless way to bridge a short gap to the end of the month. However, the use of payday loans is a real turn off for mortgage lenders and some won’t even entertain an application where there is recent payday loan use.
“Those that won’t automatically decline an application are still likely to take a dim view. That is especially true where there is regular use of payday loans, which raises concerns that the applicant is struggling to manage their finances month to month.”
So, it’s often not the payday loan itself, but more what it represents, which can hold back your chances of approval.
What if you've already taken the loan out?Don’t panic – having a payday loan on your financial records will not automatically disqualify you. If the loan was taken out years ago, lenders may be more understanding than if it was taken out last week. And if you paid your loan back within the requested period, this may go some way (very slightly) towards demonstrating that you can pay your bills on time.
OptionsIn the worst case scenario, you may simply need to rebuild your credit score while saving for your mortgage deposit and apply at a later date.
If you’ve taken out a payday loan and are concerned about an upcoming mortgage application, you can talk through your options with one of our experts today, call us on 0800 953 0304 (landline) or 0330 3030 036 (mobile) - it’s free.
Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage