What is a payday loan?
A payday loan is a product designed to be a very quick, short-term, convenient solution to a pressing financial problem, when there is no other option available. It provides a small line of credit to an individual who, having found themselves short of funds temporarily (often just prior to getting their monthly pay cheque), needs some cash at very short notice to put to urgent use, but can’t get it from family, friends, their employer or a high street lender. Usually, this is to cover essential expenses – food, rent, bills that are past their due date or other emergency payments to keep their household running.
Although originally designed to perhaps last a few days, you are now able to borrow for up to three months, and, despite the name, there is no necessary link to a borrower’s pay day. However, although convenient, a payday loan is also high-risk. As the cash is expected to be repaid relatively quickly, and there is no security on the loan, the interest rates charged are typically very high – if taken over a year, the APR could be up to 1500%, compared to a 28.8% for a typical credit card. New regulations have come into place from the FCA, capping the amount you have to repay on a payday loan at twice the amount originally borrowed.
You are probably 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. For the sake of maintaining a healthy credit score in the eyes of lenders, it is highly advisable to avoid payday loans.
Never take out a payday loan unless you are certain you can repay it on time and in full, otherwise you may find yourself in a stressful situation as the interest accrues and it becomes more difficult to meet repayments. And don’t assume that there are no alternatives.
If you need guidance on applying for a mortgage with payday loans showing on your credit records, feel free to contact our team and we will do our best to give you the best options going forward.