Having a recent payday loan on your credit history can make it much harder for you to get a mortgage at a good rate – or even at all! This post looks at the information mortgage lenders have, how and why they use it, what payday lenders say about this and what your options are.
How do lenders know you have used a payday loan?
When a mortgage lender looks at your credit history, they normally can’t see who the individual lenders are. Before 2012, it was hard for them to distinguish between a payday loan and any other short-term borrowing that you paid off. But in early 2012, Experian started to group payday loans separately from other credit cards and loans Equifax followed suit in early 2013.
Why do creditors care?
It’s pretty obvious why they should care if you have current payday loans or have struggled to repay one. But you might think that a single payday loan in the past which you repaid in full was a good thing for your credit record…
However, most major mortgage lenders take the view that using payday loans in the last year is a sign that you have had recent money problems. In these days of tight lending criteria, it can lead to rejection, even if you have no other problems. For example, a GE Money spokesman said: “Payday loan data is one of many items in this review and if an applicant has a current or had a recent payday loan, it is unlikely we will consider their application.”
There is anecdotal evidence from mortgage brokers that this sort of position is now common: “One broker said that in the last 12 months, 85% of mortgage applications it has dealt with have been turned down where applicants had payday loans on their credit history. Of these refused applications, over half (57%) had no other issues with their credit file other than the recording of a payday loan within the previous six months.”
What payday lenders say about this
Not a lot! It’s something they don’t want you to focus on at all. For example, Wonga’s website used to have an answer to the question How does having a wonga loan impact on my credit rating? – that seemed to suggest that things may well be ok, not mentioning the fact that mortgage lenders view payday loans with such disfavour. But in 2015 they removed that FAQ.
So what are your options?
If you are some way away from actually applying for a mortgage, the implications are simple. Avoid payday loans! A generation is growing up thinking that these are a simple answer to a temporary shortage of money at the end of a month, but you need to stop thinking this way and look for ways to avoid getting into this sort of situation. Look at how to improve your budgeting and get an emergency fund!
But if you are about to apply, then you have to consider your options carefully. A broker at Charcol spells out the situation:
“Let’s be clear. A recent payday loan on your credit history doesn’t mean that you can’t get a mortgage, but it almost certainly rules out most of the major high street lenders. And elsewhere, if a mortgage offer can be agreed, the rate is unlikely to be particularly competitive.”
So your choices are either to postpone applying for a mortgage until your payday loans are well in the past – a year or more – or to accept that it is likely to mean you have to pay a higher interest rate.
In 2017, there is another option that may work for some people. If the payday loans you had were unaffordable, you may be able to complain and ask for a refund of the interest you paid. Getting some money back would be good for your deposit and the Ombudsman normally tells the payday lender to delete the loan from your credit record! So if your payday loan borrowing had defaults or late payments, this could clean up your credit file. Find out more at Can I get a payday loan refund?
If you do want to go ahead right away, then go to a broker and spell out your problem. Lenders tend not to publicise their lending criteria, including their attitude to payday loans, so going through a reputable broker who is familiar with lenders’ current policies is the best approach. Applying to lenders who are just going to turn you down is a waste of your time and can lead to your purchase falling through if things take too long.