This is why they are referred to as ‘pay day’ loans because most borrowers can then pay them off at the end of the month on their pay day. These types of loans are often provided by internet lenders, although some may be provided by doorstep lenders.
People often take these loans out for an unforeseen emergency situation such as to cover boiler repairs or a vehicle break down. They offer instant money when needed but they usually come with a very high interest rate and fees, which may be disproportionate to the amount borrowed. For example you might have an interest rate of 1000%. For this reason, pay day loans are mistrusted by some and are also sometimes deemed exploitative.
Studies have also shown these loans are often repeatedly used by a borrower, even though they are supposed to be for one-off emergencies. Pay day loans appear on your credit file and they can show up in your history for six years. Indeed, any borrowing will appear in your history for that long. The older the loan, the less impact it will have on your chances of securing the right mortgage.
Therefore, if you took a loan out five years ago and repaid it on time, this shouldn’t have as much as bearing on your mortgage application as a loan you have just repaid last month. However, strict lenders might turn you down immediately products of this type feature anywhere in your history.
Can payday loans stop me from getting a mortgage?
Sunny, Quickquid and Wonga are names that spring to mind when thinking of UK payday loan companies. If you’ve ever taken one out and you’re wondering how it can affect your ability to get a mortgage, you’ve come to the right place.
Payday loan companies are associated with high risk, short term lending.
Some people make the mistake of thinking that having a payday loan can be a good thing for their credit score but this is wrong. This type of borrowing can leave a lasting mark resulting in “bad credit.”
Some lenders can refuse applications if the borrower has had a payday loan. Thankfully, with the right mortgage advice, it may be possible.
Why don’t mortgage lenders accept payday loans?
Taking out a short term payday loan can suggest that you’ve previously had financial difficulties or a shortfall of money and this can make lenders query your money management skills. This is an important factor for lenders who will want to be sure that you can repay your mortgage.
Interestingly, the Competition and Markets Authority revealed that 53% of payday borrowers took out their loan for “Living expenses such as groceries and utility bills.”
Having to take out a short term loan for whatever reason, isn’t a good indication that you’ll be able to manage your mortgage payments, especially given that your repayments may be significantly higher if you are currently renting or living with parents.
That’s why lenders will likely stress Test your income against your outgoings, to determine whether you could comfortably repay your mortgage in the event that your outgoings increase or your income decreases.
Can a higher deposit help me get a mortgage after using a payday loan company?
Lenders may be more comfortable with loaning smaller amounts to a borrower if they have had a payday loan in the past which is why having a larger deposit can help an application for a mortgage.
Having a higher percentage of the property value upfront reduces the amount you have to borrow from the lender. You may of heard your broker refer to this as the loan to value ratio or LTV.
What is a loan to value ratio?
It’s the ratio of the loan you are applying for against the value of the property you want to buy.
For example, if the property you wanted to purchase was £150,000 and you had a 10% deposit of £15,000, you would need a loan of £135,000.
To calculate the LTV rate, you would divide the mortgage amount by the value of the property and multiply by 100. So,
£135,000 / £150,000 = 0.9 (x 100) = 90%
A higher LTV rate of 90% indicates a greater risk to the lender because it would mean loaning a larger amount and therefore requiring higher monthly repayments from you as the borrower.
Before applying for a mortgage, always have a broker calculate your LTV rate and then advise you on the lenders that are most likely to accept you.
Mortgage applications with pay day loans
Most lenders who are willing to offer mortgages to people who have used pay day loans are likely to require a deposit of 15% as a minimum but some may require a far higher deposit to consider the application.
The number of lenders offering mortgage approval after pay day loans is limited. For this reason, borrowers are restricted in choice and the those who do offer mortgages can use their monopoly to charge higher fees. You might also find limited options when it comes to the structure of the finance and the repayment plans available.
The loan size will differ depending on the lender. The amount could be capped at 4x your income, or it might be 3x your income, while others can use a more complicated formula to determine the maximum amount you can borrow. You could even find yourself in the position of getting an offer of £150,000 from one lender and £250,000 from another as their formulas are so different.
Your employment status and income will make a significant difference to whether or not the lender sees you as high risk which will also have an impact on the amount you are able to borrow. The higher the deposit or equity, the more likely you are to be successful in applying for a mortgage after pay day loans. In fact, even lenders who traditionally turn down any applicant with a pay day loan history might be willing to listen to an argument if the case is put forward convincingly.
The stance of the major banks is normally not to approve borrowers who rely on pay day loans regularly. Relying on short term credit all the time will make you ineligible for their products. However, if you can show the loans are one-offs, you might be able to convince the banks to lend and thus be successful in getting a mortgage after pay day loans.
Are there mortgage lenders that accept payday loans?
Yes and that’s because each lender will have a different mortgage payday loan policy. Even if you’ve previously been declined for a mortgage because of a payday loan, there may be other lenders willing to accept you as a borrower.
For example, the length of time since you took your payday loan out can affect your appeal as a borrower. In most instances, the more recent the loan, the more likely the lender will decline but that’s not to say that other factors like the size of your deposit can’t be taken into consideration.
You may find that some lenders will be more willing to loan to you, under better terms and conditions, if your payday loan has been paid off and settled.
How can I get a payday loan off my credit report?
A payday loan will stay on your credit report for up to six years, so if you have one on your report, paying it off and settling the debt in full can help to get it off your report quicker and improve your debt to income ratio.
If you’ve never taken out a payday loan but your credit report says otherwise, you can dispute the debt with the original creditor and ask for proof of the agreement. This can be a lengthy process but your broker can guide you on the steps to take.
Should I check my credit report if I’ve taken out a payday loan?
If you’ve ever taken out a payday loan, it’s vital that you check your credit report ahead of applying for a mortgage. Being aware of your financial history can help to save time, afterall, there’s no point in applying to a lender with criteria you can’t meet.
A mortgage rejection will cause you delays, cost you wasted money in application fees and could even negatively impact your credit report - something you need to avoid as a borrower with a payday loan on your file.
Where can I get help about applying for a mortgage after a payday loan?
Our advisors can help you to sign up and access your report and can explain how the information on your file could be perceived by lenders.
Using their experience, they can identify the lenders that are most likely to accept your application while also comparing the most competitive interest rates available for you.