Any loan for a period of less than 12 months, which could include weekly collected loans, shopping check providers such as Provident Mutual together with payday loans provided by companies such as Wonga and QuickPay, is classed as a short-term loan.
Why do payday loans affect your credit score and chances of obtaining a mortgage?
When a lender assesses an applicant for a mortgage they will check the applicant's credit history. Whilst lenders will typically 'credit score' an applicant they will also look at the type and frequency of any finance both outstanding and completed.
To a lender borrowing £150 in the middle of the month suggests that you cannot manage your finances very well, or worse still you cannot afford to live on your income. If your income is stable then this shouldn’t be the case. They then have to ask themselves “if we now commit you to a new mortgage, which probably increases your regular outgoings, will you be able to keep up the payments?” That would put your home at risk, and therefore be unfair to you so they err on the side of caution.
The situation is made all the worse because typically payday loan customers also tend to rollover the debt every time it reaches its settlement date, just as the provider encourages them to do. Often there can be 20 or 30 entries for these transactions, running consecutively, each slightly more than the last. This is hardly surprising as borrowing your wages from next month, means that when you pay the money back you are then short for the month again.
If I pay these payday loans back on time won't this improve my credit score?
Many customers are convinced that because they have been offered these short term loans, and paid them back on time, they are generating a good credit “score” and enhancing their credit report. Technically they are correct, and they may well see the score on their credit report improving. However, as stated lenders will now look at your credit history in a wider sense before making a decision.
Credit history is particularly important where First Time Buyers are concerned, as they have no experience of having to pay a mortgage and taking on other financial responsibilities involved with home ownership.
If I have had credit problems in the past will this mean that I will not be able to get a mortgage?
Not necessarily, it all depends on the details. A lender will not accept excuses that just show you are unable to live within your means. If, however, you have experienced a real problem, such as illness or unemployment and had to borrow money to pay bills, then a lender may well be more sympathetic.
A lender will want to know not only the details of the problem but also need some reassurance that you have taken measures to ensure that it won't happen again. The basis of your story needs to be confirmed in some way and that everything is now resolved from a financial viewpoint. This story will be supported if you haven’t resorted to further short term credit since getting back to work. Arranging Income Protection insurances to avoid a similar scenario will also show that you are genuine.
What do lenders look for on a credit report?
So what lenders look for on a credit report is that there is no short term credit to be shown for at least a year. If there are any entries you will have virtually no chance of obtaining a mortgage. A one off contract 10 months ago might be considered, but not if it is the 2nd or 3rd time that you’ve resorted to payday credit.
The lender will not just check the actual account data section on your credit report but also the searches section of the credit report as this shows whether you have been looking for further credit that may not have been agreed.
However, there are some lenders that will consider an application after 12 months good credit history. However, you may find that you’ll need a bigger deposit as the lender is taking a greater risk in agreeing a mortgage. You might also find that the rate you pay will be higher due to your credit history.
What to do next
So what you should take from the above is that it is possible to get a mortgage even if you have used payday loans in the past, despite what most people think. The first step is to download a current copy of your credit report. You can get it for free from Experian. So do that now.
Next you need to talk to a mortgage adviser who specialises in mortgages for non-standard cases such as yours. They will be able to put your case to potential lenders in the most sympathetic light which greatly increases your chances of securing a mortgage. Don't forget when the mortgage adviser applied for a mortgage on your behalf you need to be confident that he knows what he is doing otherwise you could end up with a mortgage rejection on your file too.
Darren Amos
Financial Planning Designer
If you would like to contact Darren for help with trying to get a mortgage then you can contact him.
Find out if you could get a mortgage
You can ask Darren directly, online, if you would be able to get a mortgage based on your circumstances. Most people can.
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