Beware – payday loans affect mortgage applications - Loans - News - Moneyfacts

News News brings you the latest financial & economic news & reviews of the best products in the UK by our team of money experts.

Beware – payday loans affect mortgage applications

Beware – payday loans affect mortgage applications

Category: Loans

Updated: 06/11/2013
First Published: 06/11/2013

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Taking out a payday loan is becoming an increasingly common way for consumers to get a short-term cash injection to help make ends meet. But, many aren't aware of the potential consequences – did you know it could affect your mortgage application?

It's something that too few consumes are aware of, but having a payday loan on your credit history can be a serious black mark for a lot of mortgage providers – and that means many will decline a mortgage approval.

With more and more consumers turning to payday lenders and the popularity of Help to Buy meaning more people are making mortgage applications, the issue is becoming heightened. There's been a notable increase of would-be homeowners either being declined for a mortgage or being offered an amount significantly less than they applied for, with both being a direct result of having taken out a payday loan.

The reason for this, however, is clear-cut. As far as mortgage providers are concerned if you've taken out a payday loan it's proof that you live beyond your means, and that makes you a high-risk borrower.

Unfortunately, this is a risk that no-one warns about. The lenders themselves don't tell you that taking out a loan can damage your chances of getting a mortgage, and even those in the industry aren't fully aware of the consequences – the new chairperson of the Financial Services Consumer Panel, for example, thinks they're perfectly OK in certain situations and akin to putting the cost on a credit card – so it's important for consumers to educate themselves and exercise caution.

It's even more concerning that, despite Financial Conduct Authority (FCA) regulation set to come into force next year, the proposals haven't included the need to warn consumers about the impact a payday loan could have on mortgage approval chances. This, according to industry experts, is a glaring omission and is something which should ideally be rectified.

In the meantime it's important for consumers to get independent advice, particularly if they've taken out a payday loan and are seeking a mortgage, in order to assess the likely impact on the application. There are still some lenders who will offer a mortgage to those who have taken out such a loan although they're likely to be at a higher rate and probably won't come from a high street lender, and getting independent advice can ensure you know how best (and where) to proceed.

So, even though you might think taking out a payday loan is a simple, straightforward way to help cope with an unexpected bill, be warned – it could seriously affect your chances of getting a mortgage in the future.

What Next?

Compare loan repayments and interest with our easy-to-use loan calculator

Find the best mortgage deals

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

Related Articles

Blue Monday hits nation’s finances

Today has been dubbed Blue Monday – the most depressing day of the year – and considering how many people could be battling with their finances this month, it’s little wonder.

Calls to make the loans market clearer

At first glance the personal loans market may seem simple enough, but get into the nitty gritty and it can be anything but. As a result, some are calling for action to make the market clearer and fairer for all.

Get the cheapest ever personal loan!

Have you woken up with a financial hangover after the festivities? Perhaps you’ve got big plans for the year ahead, or maybe you need a new car? Well, whatever your reasons for needing a loan, you can now snap one up for the cheapest ever rate!