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!
If you have used payday loans, the rule of thumb for a mortgage application is to wait until at least 2 years have passed after your last payday loan was settled.
Before coronavirus, the usual advice was to wait one year. But from 2020 many mortgage lenders have tightened their mortgage requirements.
Even after the two year point, with payday loans showing on your credit record you should always go through a good broker. And you may still have difficulty if you had a lot of payday loans.
One way to try to clean up your credit record is to make a payday loan affordability complaint.
How do lenders know you have used a payday loan?
Mortgage lenders check your credit records when you apply. Most will do this before giving you an “agreement in principle” and they will then recheck more thoroughly before approving your actual application when you have found a property.
These credit checks don’t show exactly who you borrowed from. But they do show the sort of borrowing – loan, overdraft, credit card.
All three credit reference agencies in Britain – Experian, Equifax and TransUnion – show short-term high-cost borrowing such as payday loans separately from other loans. So a mortgage lender can see if you have used payday loans and when your last one was repaid.
Why do mortgage lenders care?
Mortgage lenders are a cautious bunch because they are giving you a large loan for 25 years or more. Although they have your house as security, they only make profits on lending where the borrower does not get into big financial trouble. So they want to weed out any applicants who may get into difficulties.
People in a good financial position don’t need to use payday loans – they have better ways of borrowing that don’t involve interest rates of 100% or more.
So using a payday loan, even if you repaid it on time, is seen by most mortgage lenders as a big warning sign that you had financial problems. And if that is recent they are probably going to reject your application.
As Which? says:
In a financial rough patch, you might turn to a payday loan, but doing so can have repercussions for years to come. Many lenders are unwilling to lend to someone with a payday loan on their record, even if it was fully paid off on time and from several years ago.
But doesn’t a repaid payday loan help your credit score?
Yes, it does. Making the payments on time for any sort of credit adds positive marks to your credit record. Unless you have a lot of big problems in your credit history, repaying a payday loan will tend to improve your credit score.
But your headline credit score isn’t a number that matters to a mortgage lender so this won’t help a mortgage application at all.
Instead they look at the details of all your borrowing and that includes whether you have used payday loans recently.
“Recently” – how long ago is ok?
Mortgage lenders set their own criteria here:
- some don’t like to see any payday loans at all, ever;
- a year used to be a common rule. This is what one reader said in a comment below this article:
My last payday loan was in November 2017 and I got a mortgage with [a high street bank] in January 2019.
I had waited 12 months to clear the “recent” impact of payday loans.
- from mid-2020 there are indications that most high street lenders now want to see that your last payday loan was more than 2 years ago.
What are your options?
If you are some way away from actually applying for a mortgage, the implications are simple. Avoid payday loans!
You may feel that making the maximum savings into your LISA is the best thing to help with your house purchase, but if that leaves you so short of money that your credit record suffers or you have to get a payday loan in an emergency this isn’t sensible.
If you missed some payments or had defaults on payday loans
Here it isn’t just the payday loans that are the problem, it is the negative marks on your credit record.
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 it has the good side-effect that negative marks are usually deleted from your credit record!
This is one of the very few situations in which defaults can be removed before they drop off after six years.
So if your payday loan borrowing had defaults or late payments, this could clean up your credit file. Find out more at How to ask for a payday loan refund.
Has your lender gone bust?
If you borrowed from a lender which is in the early stages of administration (that’s like bankruptcy for a company) then you can make a claim to the administrators about unaffordable lending.
But if they have are in the late stages or have already been liquidated as a company, you can still get those loans removed from your credit record by asking the credit reference agencies to “suppress” them because the loans were unaffordable but you can no longer get the lender to remove them.
Did your payday lender say they would help your credit record?
Some payday lenders say using their loans will help your credit score. Paying any credit on time helps your credit score, that’s true…
But if the payday lender website or app doesn’t also say that payday loans show as a special category on credit reports and that some lenders, especially mortgage lenders, are likely to decline you if you have had payday loans, then that is misleading.
In this case, you can complain to the lender and ask them to remove the loans from your credit record entirely. If they refuse, send your complinat to the Finacial Ombudsman.
Take a screenshot of the misleading information to help your complaint. If you are sure you saw it, but the website has since changed, have a look at old copies of the website using the Way Back When Machine.
If you had payday loans & they were repaid on time
If the payday loans were repaid without problems, then:
- wait until the last one was repaid more than two years ago;
- after that point, talk to a good broker who will know which high street lenders are likely to approve your application; and
- also have a look at whether you can get a payday loan refund. It won’t help your credit record but it could boost your deposit.
Applying directly to a lender is taking a gamble, so it is always better to go through a reputable broker.
This doesn’t have to be a “bad credit” broker if the only problem on your credit record is a few payday loans. Two good brokers are London & Country, a fee-free broker that covers the whole market and Habito which has an online service.
Last updated in January 2021.