You might be aware that taking out a loan and repaying it according to the terms of the agreement is one of many ways you can show you are a reliable borrower, and therefore improve your credit rating.

Unfortunately the same is not true for payday loans. Due to their desperate nature, mortgage lenders will see any mention of a payday loan on your credit records as being a sign that you are not able to competently manage your day-to-day finances. This will raise a red flag on any mortgage application.

If paid on time they may not drastically decrease your credit score^[1], although lenders don’t like to see them in your credit file at all. Therefore, for the sake of maintaining a healthy credit score in the eyes of lenders, it is highly advisable to avoid payday loans.

Keep in mind, if you make late payments or miss payments all together on your payday loan(s), then this will no doubt negatively impact your credit score.

The main thing a lender will look at during a mortgage application from an individual with previous payday loans is the time that has passed since the loan(s) and the frequency of the payday loans.

For example, if you took out one payday loan four or five years ago because your car needed fixing, as long as everything else on your credit report being exemplary, the chances are it won’t have much impact on your credit standing. In turn, lenders will be more inclined to lend to you.

If, however, your credit history shows a series of payday loans over the past couple years – even if they have been paid off on time and in full – it suggests a pattern of poor money management that lenders believe may show you to be a credit risk. Therefore, your lending options will be further reduced as many lenders won’t be willing to offer you a mortgage.

This means, in certain circumstances, before applying for a mortgage it can be better to let time pass and ensure you current finances are in a better position.

Deposit requirements will vary for everyone, as each applicant’s circumstances are different, making it hard to give an exact figure.

The number of payday loans you have used and the time that has passed since will all have an influence on a lender’s deposit requirements. This is on top of a variety of other things too, like the property value, your income and the rest of your credit history.

An individual who is seen as ‘lower risk’, because they had one or two payday loans over four years ago, will require a smaller deposit than someone who has had a string of payday loans over the past year, in turn making them a ‘high risk’ borrower.

Usually the minimum deposit required for any applicant is 5% of the property’s value. However, if you have had payday loans we would recommend being able to provide 10–15% of the property’s value as a minimum.

If you’re unsure on how much deposit you may need, get in touch today. One of our expert advisors will be happy to discuss your situation in a free initial consultation.