Mortgage Eligibility After Using a Payday Loan

Payday loans are relatively small short-term loans available from certain high street shops and dedicated internet sites.  Payday loans are used for ease as they have minimal lender checks, but are notorious for having extremely high rates of interest.  They are often described as “risky loans” for people who are in desperate situations or who are unable to correctly manage their finances. Simply applying for a payday loan could adversely affect your credit score. The more payday loan applications you submit, the greater the impact on your credit file.

Applying for payday loans in the past will not necessarily prevent you from obtaining a mortgage now. It depends entirely on the nature of the case and the policies of the mortgage lender. You may however find that many major banks and high street lenders are unwilling to deal with your application simply because you have a history of taking payday loans.

UK Property Finance can answer questions about mortgage eligibility from concerned applicants with a history of taking payday loans:

  • Can I get a mortgage after using a payday loan?
  • How long will a payday loan affect my credit report?
  • What types of payday loans are most harmful?
  • Can I improve my credit score with a payday loan?
  • Why are payday loans considered negative?
  • Will I get a mortgage with a poor credit score?

Can I get a Mortgage after using Payday Loans?

It is not straight forward, but it is still possible to obtain a mortgage after using a payday loan. There are various factors that mortgage lenders consider and scrutinize when processing and before agreeing this type of application such as the number of payday loans you have taken, whether they have all been successfully repaid, how much you intend to borrow, your current financial status, proof of income and your general credit history etc.

Your choice of lenders when applying for a mortgage will be the most decisive factor of all. While some lenders automatically exclude borrowers with a history of using payday loans, others give all applications fair consideration. UK Property Finance have access to flexible lenders and use strategic methods to help you decide which lenders are more likely to approve your mortgage application.

Do Payday Loans Affect my Credit Score?

Almost every financial product and service you apply for will be recorded on your credit file. There are occasional exceptions, but payday loans in general make their mark. Even if they are not showing on your credit report, your use of payday loans will normally show on your bank statements. Payday loans that are paid correctly will not automatically affect your credit score however they will often be viewed negatively by many lenders who manually review your file, just because you have used them.

How long does a Payday Loan stay on my Credit File?

Most activity recorded on your credit file stays published for six years after the date the debt was settled, written off or defaulted. Any payday loans repaid more than six years ago therefore should not show on your credit file so on their own should not prevent you from qualifying for any mortgage product.

Which Payday Lenders should be avoided to preserve my Credit?

All payday lenders should be avoided where possible. They offer risky short-term loans, often taken in times of extreme desperation and poor money management and agreed without the lender conducting proper credit checks and at extremely high rates of interest. It is risky lending and if the borrower is unable to make the repayments on-time they will undoubtedly enter a growing cycle of unmanageable debt that is often rewritten by the lender on numerous occasions hindering the borrowers escape. This will negatively impact the borrower’s credit report in such a way that it will reduce the likelihood of securing a mortgage loan, although it is still not impossible.

How long after having a Payday Loan can I get a Mortgage?

If you have not taken a payday loan within the past six years and have an outstanding credit history, you will probably be considered eligible with most lenders. By contrast, if your payday loan was taken recently, and you have additional blemishes on your credit file, you may find it more difficult to qualify for a high street mortgage and may need to consider a more flexible lender. Contact UK Property Finance for further help and support.

Can responsible Payday Loans benefit your Credit Report?

This is one of the most common and dangerous misconceptions of all. Certain, less responsible payday lenders peddle the impression that applying for payday loans and repaying them correctly and on time will improve your credit score. Unfortunately, the supposed ‘benefit’ of repaying a payday loan on time is augmented entirely by the fact that you applied for one in the first place.

Irrespective of how quickly and responsibly you repaid your payday loan, you may still be considered by certain mortgage lenders as ‘high risk’ for using payday loans in the first place. There is no realistic instance where payday loans are helpful in improving your credit score and any payday lender saying this, is being dishonest.

Do Payday Loans always harm your credit?

There are some instances where applying for and receiving a payday loan will not show on your credit history. There will always however be evidence of the payday loan on your bank account statements which are used by mortgage lenders to process your application through to completion. The answer therefore is YES!

Why do Mortgage Lenders not like Payday Loans?

Mortgage lenders have a strong opposition to payday loans as they are considered one of the highest risk financial product on the market. Payday loans, not paid on time, can trigger the kind of debt spiral that is difficult to leave.

Payday loans are generally considered as a last-resort for people in desperate situations or those who have mismanaged their money. A history of payday loans therefore suggests a history of financial difficulties. Even if the payday loan was taken out for legitimate reasons and repaid on time, the negative implications remain.

Anyone with a history of payday loan use should consider expert mortgage broker support by a company such as UK Property Finance when deciding on which mortgage lender to approach.

How will Payday Loans affect my Mortgage Application?

Payday loans can affect mortgage applications in a variety of ways, including, but not limited to the following:

  • A lower likelihood of being offered a high Loan to Value (LTV) mortgage.  A maximum loan of no more than 70% to 75% of the property’s value is normally offered therefore a deposit of at least 25% to 30% is required.
  • Fewer options available in terms of lenders willing to consider your application, given the negative implications of payday loans.
  • Overall borrowing costs can also be elevated if the lender considers a history of payday loans as an indication of a high-risk borrower.
  • Limitations may also be imposed on how much can be borrowed, typically calculated as a multiple of total annual income.

Mainstream lenders may take a particularly rigid stance against payday loan use, but this is not always the case with smaller independent lenders.

Can I apply for a Bad Credit Mortgage after a Payday Loan?

It is not uncommon for applicants with a history of taking payday loans to also have additional blemishes on their credit file. Payday loans leave their mark on your credit report as will missed loan payments, rent arrears, loan application rejections, unauthorised overdrafts and so on. All these factors will make it more difficult to qualify for a conventional mortgage.

Specialist bad credit mortgage lenders who accept applicants with a history of payday loan use almost always accept those with an imperfect credit history. UK Property Finance use numerous specialist lenders and offer a range of competitive mortgages to ensure clients always get the best possible deal available to them.

The importance of Independent Expert Advice

At UK Property Finance, our experience working with mortgage applicants from a diverse range of backgrounds, is rarely challenged by our peers. We have no direct ties or affiliations with any of the lenders we use which enables us to provide 100% honest and impartial advice and support.

Irrespective of how complex or challenging your situation may be, we will do what it takes to find your perfect loan. For more information or to discuss your requirements in more detail, contact a member of the team at UK Property Finance anytime.