Will a Payday Loan Affect My Chances of Getting a Mortgage?

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Will a payday loan lead to the frustration and disappointment of being turned down for a mortgage? - Credit: Getty Images/iStockphoto

Payday loans are a type of high-cost loan that is often used in an emergency and consisting of just a few hundred pounds. 

Whilst these loans are often used for just a few weeks or months and not on a regular basis, they can have a negative connotation for someone who is living pay-cheque to pay-cheque - and this may be viewed negatively by a future mortgage provider. 

We speak with financial expert, David Beard, the founder of price comparison site, LendingExpert.co.uk to find out more. 

Will I Be Denied a Mortgage Due to Having a Payday Loan? 

“Yes, it is possible that you can be denied a potential mortgage due to having a history of payday loans on credit file,” confirms Beard.  

 “However, it will depend on the extent of this. Having just one payday loan a few months or years ago that is paid back on time is not too concerning.

“But habitual payday lending and struggling to keep up with these payments is going to set off warning signs for the lender and your application will probably be declined. 

“In my experience, some mortgage and secured lenders will immediately decline any applicants with a history of payday loans, but some others will take a view and arguably treat them like any other loan, just as long as it was paid off on time.” 

An empty mortgage application form with house key

Owning your own home is a dream - but can it be undone if you've taken out a payday loan? - Credit: Getty Images/iStockphoto

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Why Do People Use Payday Loans? 

Payday loans are used by around 3 million Britons per year, with the average loan size around £300 and paid off over 4 to 6 weeks. 

Payday loan products are often short-term and used for emergencies, whether it is paying for rent, household repairs, car repairs, plumbing problems or just staying on top of their debts.  

The high-cost nature of these products mean that they can exceed more than 1,000% in APR, despite the fact that it is just a short-term product that is not used for a full year. Therefore, they are not advised to be used long-term and are often seen as an effective way to tide you over until your next payday from work. 

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See if there are alternatives to taking out a payday loan - whether borrowing from family or raising extra cash at a car boot sale - Credit: Getty Images/iStockphoto

What Alternatives Should You Consider Instead of Payday Loans? 

“There are a number of viable and very low cost alternatives to payday loans,” explains Beard. “This will help keep your potential mortgage application nice and clean, whilst also saving you money and avoiding falling into debt.”

“Borrowing from family and friends is the most popular and affordable way to borrow money, since it is often interest-free and without penalties.

“Other options include borrowing from a credit union, but note that this can take a few weeks to come through.

 “You can also consider selling household items that you do not need, such as clothes, CDs and board games, which can be sold online or at car boot sales. 

 “Other more affordable loan options include personal loans or secured loans, if you have collateral that you can use.” 

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It pays to get your finances in order and boost your credit score before applying for a mortgage - Credit: Getty Images/iStockphoto

Is There Anything Else I Can Do To Boost My Mortgage Chances? 

“Yes,” concludes Beard. “If you are going through the motions and looking to apply for a mortgage, one of the best things you can do is sharpen up your credit score.” 

“You can use a free trial from one of the main credit reference agencies or apply for a credit report for just £2.” 

“You may find some simple ways to improve your credit score, such as clearing off some debts or closing down credit cards or store cards that you do not use. In fact, if you have no credit, it might be worth looking at a credit builder credit card to slowly build up your credit score.” 

“Above all, having a stable income and employment will maximise your chances for you and your spouse to get a mortgage approved.” 

Think carefully before securing other debts against your home. 

Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it. 

To get a mortgage quote for free, you can speak with Lending Expert today on 0161 820 8099 or check your eligibility here for free.