Mortgages after Payday Loans

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Mortgages after Payday Loans

  • Mortgages with payday loans
  • Poor/Bad credit ratings accepted
  • Access to over 90 lenders
  • 5* Service
  • Free no obligation advice
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Author: Carl Shave - CEO and co-founder
Last updated: May 20th, 2022

How to get a mortgage after a payday loan

Can pay day loans improve my credit score? The short answer to this question is ‘no’. A payday loan definitely will not help to improve your credit rating.

Payday loans are intended to offer a short-term financial boost – think of them as a financial sticking plaster for when the unexpected happens and no other options are available – but as a long-term option they offer little benefit to those who use them. Payday loans should never be used to manage long-term debts.

The main reason for this is that the fees and rates of interest generally charged by payday lenders are comparatively high – and if for some reason you can’t repay the loan in full on payday but have to extend it, those costs quickly escalate.

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.

Let’s look at a couple of examples. When you borrow money the lender, by law, has to show the annual percentage rate, or APR, of the interest that will be charged.

Say the APR on a loan is 20%; that means if you borrow £1,000 and pay it back over one year, you will pay back £1,200 – that’s the loan capital plus 20% interest.

When you apply this to a payday loan, however, you start to see the trap you could be stepping into.

You see, even though payday loans are only intended to be a short-term form of borrowing, many people end up extending the loan for longer than one month.

Say you borrow £100 from a payday lender offering an APR of 1000% (and if that sounds expensive, you should know that some charge more). If you extend the loan over six months, then the total interest you pay back will be £232 – more than double the modest amount you originally borrowed.

The interest amount is not as straightforward to work out as it was in the original example because each month you would be borrowing enough to pay back the original loan plus the interest accrued, and you’d be charged interest on that full amount, month after month; that’s why it keeps going up and up, and why it can be so hard to get out from under if you start borrowing this way.

Some of the rhetoric surrounding payday loans has historically given the impression that a payday loan can have a positive effect on your credit rating. The argument goes that by taking a payday loan and repaying it on time and in full, you can strengthen your case with lenders. This, however, is not the case and the simple presence of a payday loan on your financial history can have a serious detrimental effect on your ability to successfully apply for a mortgage.

We know this seems counter-intuitive; usually if you were to borrow an amount of money and pay it back as agreed it would help your credit standing, so why are payday loans different?

The Problem with Payday Loans and Lenders

The problem is the nature of the loan. If you borrow enough money to buy a car and then pay it back over two or three years, as agreed, then that helps build up your credit history, as it demonstrates that you can plan, budget and manage your finances.

If you need to take a payday loan, however, it suggests that you cannot manage your money. Even if you pay it back as agreed – which might enhance your credit score with the credit reference agencies – it will not help when it comes to a mortgage lender. Lenders interpret credit history data according to their own set of principles, and they do not like to see payday loans on an applicant’s credit history.

Payday loans were designed in order to give individuals access to money quickly, when required. While the borrowing might be triggered by something unexpected, the inference is that you had no financial contingency in place and no other options open to you.

Unfortunately this is something that mortgage lenders don’t want to see, which is why payday loans impact on credit rating. You will be viewed as a higher risk, and possibly as someone who they cannot be confident will make their mortgage repayments in full and on time.

Looked at from a lender’s point of view, the use of payday loans is an indicator of poor money management, and that is just one reason why we recommend that you avoid them. Instead, you should look to put something in place that will mean you do not need to access payday loans. Even if you have had to use them in the past, aim to set things up so that you do not need to again.

It is a good idea to explore other options to improve your cash flow and financial situation rather than expecting payday loans will plug any gaps in your finances. Some of the options listed here are long term, but they will all help prevent the sort of situation that would trigger the need for a payday loan.

  1. Watch out for overspending – Review your outgoings and save money where possible; for example, if you always buy brand name grocery items, try supermarket own label products; cut out your daily ‘posh’ coffee; pack your own lunch rather than buying pre-prepared food each day; cancel any unused or unnecessary memberships and subscriptions (for example, gym membership and magazine subscriptions).
  2. Use credit cards less frequently and more wisely – Credit cards present a seemingly easy solution to short-term cash flow problems, but relying on them when cash is short will add to your debt and simply move your debt problems to another time – not least, when they hit the upper limit and you no longer have access to any credit. Instead, aim to pay off any outstanding credit card debt (you’ll save additional money on the interest fees when it’s dealt with) then use your card for purchases you know you can pay off in full each month. This will help build up a credit history and you’ll avoid carrying expensive debt.
  3. Find ways to increase your income – It may seem like an oversimplification, but increasing your income is the best way to improve your cash flow. Are you able to get a second job – perhaps something part-time in the short term – or else take on some freelance work? Is there the possibility of gaining a promotion at work? Is there a better paying job with a competitor, especially if you can also cut your commute in the process? Be careful not to increase your spending alongside your income or else you won’t see the benefit; use the extra cash to pay off debts or add to your savings.

As with so many credit issues, timing is key. Credit events stay on your credit file for six years, and that applies to everything, good and bad: six years’ history of credit card and loan repayments, six years for County Court Judgments (CCJs), six years for details of a debt management plan (DMP), individual voluntary arrangement (IVA) or discharged bankruptcy. A payday loan will also be visible for six years.

As to how payday loans affect credit rating, there are some lenders who will decline an application from anyone who has accessed a payday loan recently, and others who will automatically decline an application if they have been accessed at all.

However, while payday loans might reduce your options, it is generally still possible to get a mortgage.

Other considerations to take into account include the loan-to-value (LTV) ratio you are looking for from your mortgage and the outcome of the affordability assessment.

Loan-to-value (LTV)

This refers to the percentage of the price of the property you want to borrow; the balance will be put down as a deposit. Generally, only those with exemplary credit records (and that includes no record of a payday loan) will be offered a 95% mortgage. Applicants with credit issues are likely to be expected to provide a bigger deposit – expect to be asked to put down 15% or more. The mortgage may also cost you more, in terms of arrangement fees and/or interest rate.

 

Affordability

All mortgage applications are subject to an affordability assessment, which looks at income and outgoings in order to assess whether the applicant can afford the repayments. This is also an element affecting how much a lender may offer you.

The more adverse credit issues there are on your credit record, the trickier it can be to get a mortgage. Remember that no matter how the credit reference agencies record the details, lenders consider payday loans in the same way they do bad credit issues such as late or missed payments, or CCJs.

If for whatever reason you also defaulted on or extended the payday loan, this adds to your problems. Getting a mortgage with a mixed history of adverse credit events is tricky, but the further back in your credit history they are, the better your chances.

If you can show that while you may have had issues to deal with in the past your finances are now on a steady footing, and if you also have a good deposit to put down, things start to look better.

Regardless of your history as a property buyer – whether you are an experienced landlord expanding an existing property portfolio or a first-time buyer getting a foot on the property ladder – payday loans and bad credit can be a major stumbling block in finding the mortgage that you require. Many high street lenders will turn down applicants based on their history of adverse credit, and payday loans will only serve to worsen the problem.

We understand that this is an unfortunate situation for some individuals. However, even if you have had a payday loan in the past, please contact us regarding a bad credit mortgage. In some instances, we may still be able to find a suitable mortgage for you as all our lenders will look at your credit history as a whole, not just at one element in isolation.

If you have had payday loans in the past and feel your credit rating may have suffered because of it, please head to our credit report page to access a copy of your own credit report. Alternatively, head to our “How to improve your credit rating” guide to see what you can do to improve your financial situation.

If you already have a copy of your credit report, then please contact one of our trained advisers.

Much has been reported on in regard to pay day loans especially in respect to the rates and terms the companies who offer these facilities offer however, little is advertised or spoken of in regard to how they may affect your credit score.  Although singularly in their own right a pay day loan will rarely impact on your credit score they are very rarely seen as a positive aspect of your credit background.  Many lenders are wary of those that have used a pay day loan in the past and although it may not have impacted on your credit score, it can still be sufficient for a lender to decline your application.  From our experience we strongly urge customers not to freely enter into a pay day loan agreement without firstly considering the possible implications this may have on their future mortgage arrangements.

– How do payday loans work?

A payday loan is an arrangement whereby you borrow a specific amount from a lender on a short-term basis, normally 12 months or less. The term payday loan is used as the agreements are usually used to bridge the gap to a borrower’s next pay day when the loan can be repaid.

 

– Can I get a payday loan with bad credit?

There are some short-term lenders that will allow you to take out payday loans with bad credit. It is worth seeking debt advice as well as advice on to how this would affect your credit profile before entering into any short-term borrowing, as contrary to some advice and beliefs, payday loans can have a detrimental impact on future loan or mortgage applications.

 

– Can I get a mortgage with a current payday loan?

Possibly, although your options will be limited.

Your chances of getting a loan from a high street lender if you have a current payday loan are relatively low.

If everything else on your credit file is in good order and you have a sizable deposit, then a specialist lender may look upon your application more favourably – although even then you may not be approved if the payday loan is still active or has been in the last 3 months.

Our team of specialist mortgage advisers can offer free, no-obligation, initial advice to help you find the best deal for you.

 

– Can I get a mortgage with a history of payday loans?

Possibly. It depends on two things – the attitude of the lender, and the condition of your credit report other than the payday loan history.

While some lenders will automatically decline a mortgage application from anyone with a record of payday loan usage, others are more flexible.

If the only issue with your credit report is payday loan usage, and especially if it’s not recent, then it will have less of an impact than if you also have late and/or missed payments and the loans were within the last twelve months.

Payday loans stay on your credit file for six years, and as more time passes, the less impact they will have.

 

– What do lenders class as a payday loan?

Payday loans are short-term – generally comparatively expensive – credit agreements, that have to be repaid within a month. They are intended as a one-off “quick fix” for people who are faced with an unexpected expense that won’t wait until they get paid – such as if the boiler stops working in winter, or the car breaks down and you can’t get to work without it.

They show on your credit report as, for example, “advance against income” or “revolving credit”. If the name of the payday loan lender (for example, Wonga or PaydayUK) also shows, then that in itself can be a red flag.

 

– Why do lenders dislike payday loans, even if they’ve been paid on time and in full?

It’s not so much the loan itself they dislike as what lenders believe it indicates. Payday loans are seen as an indication of someone’s inability to manage their money.

If you took out one payday loan four or five years back because your car needed fixing and everything else on your credit report is exemplary, the chances are it won’t have much, if any, impact on your credit standing.

If, however, your credit history shows a series of payday loans – 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 poor credit risk.

 

– I’ve had a payday loan in the last 12 months, can I get a mortgage?

Possibly, although probably not from a high street lender.

Payday loans are treated in a similar way as adverse credit events, such as missed payments or defaults. With a 10% or smaller deposit, and with additional red flags on your credit file, your chances are reduced.

If everything else on your credit file is in good shape, and you have a decent deposit to put down, your chances and your options begin to improve.

Contact our specialist bad credit mortgage advisers – they can help you find the best deal for you.

 

– Do payday loans affect credit score?

Taking out any kind of short-term debt on a regular basis can have an adverse effect on your credit profile. Many mortgage lenders will also have set criteria on how many payday loans you can have within the last six years.

 

– What happens if you default on a payday loan?

If you default on a payday loan, the record will continue to appear on your credit file for six years. The default would then likely impact on your future borrowing applications during this period.

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