Will past payday loans stop me getting a mortgage?

Dear James,

Will payday loans affect me being able to get a mortgage? I used these in the past but not for the past few months and do not intend to ever again, I just found myself living beyond my means. I have now started saving and am focused on clearing my credit card but am worried that a couple of years down the line I'll be refused a mortgage because of payday loans on my record. All were paid back on time but I'm still worried as I used them numerous times.

Laura, Northern Ireland

Dear Laura,

I really don’t think you need to worry about this, but I understand why you are concerned. There has been quite a bit of speculation in the press recently on whether customers who’ve used payday and other short-term loans are being refused mortgages because of this. The debate appears to have been recently fuelled by a survey of mortgage brokers. Lenders certainly do look at people’s credit reports very closely these days. They want to lend responsibly and are required to make sure that any credit they grant is affordable. This is particularly true for mortgage lenders.

I looked at this issue last year when another reader asked a similar question (Do payday loans damage your credit rating?), although not specifically about mortgages. Our position on payday loans and credit ratings remains unchanged – each lender will assess your credit history using its own criteria and while some may see a successfully settled and well-managed payday loan as positive, others may disagree. Importantly, each lender’s own creditworthiness assessments will be based on how its past customers who had used short-term credit when they made their applications then went on to behave – that’s how credit scoring works.

Lenders will also usually make affordability assessments and use them alongside creditworthiness calculations to help decide on someone’s suitability for new credit. And it’s possible that a fair chunk of the mortgage refusals cited by brokers in the previously mentioned survey were based on affordability calculations and that for these customers their payday loan use was merely a symptom of underlying financial issues. But lenders know that customers who use short-term loans aren’t necessarily in financial dire straits.

Take a look at this thisismoney.co.uk article on mortgages and payday loans. It quotes a major mortgage lender on how they treat applicants who’ve used payday loans and mirrors previous comments made by at least one other large provider. So just make sure you continue to manage all of your credit commitments sensibly and, importantly, you refrain from applying for any other credit in the months leading up to your mortgage application. And if the lender agrees with you that you can afford whatever loan you are requesting then your application should get a green light.

You can check your free Experian Credit Score every 30 days to see how a lender might asses your credit report. You can also use our CreditExpert service to view your credit report and score, or order a one-off copy of your free statutory credit report. (December 2013, updated April 2018)


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