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Do payday loans affect your mortgage application?

Payday loans were cited recently as staying on your credit record for up to 6 years and affecting your chances of getting a mortgage. Our experts at Experian shed some light on why this isn't always the case...

Low interest rates, plus the increased costs of renting, can make home ownership increasingly affordable to many.  But getting a mortgage in the first place can seem one of the biggest hurdles of all.

The rise in the use of short-term, ‘payday’ loans , and some recent negative publicity surrounding it, can lead to many potential mortgage applicants wondering if this may count against them. However, this need not be the case.

Lenders are looking for proof that you’re a reliable and responsible borrower. 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. Because lenders have different past experiences and expectations, they take different factors into consideration and score things differently.

Importantly, each lender’s own assessments of creditworthiness 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 they will know that customers who use short-term loans aren’t necessarily in financial dire straits.

If you are thinking of making a mortgage application, try to avoid making applications for other credit in the months leading up to it   Each application is recorded on your credit report and if lenders see lots in a short period, they could think that you’re desperate or suspect a fraud. Experian CreditExpert can help match you to credit products that suit your financial status and credit rating.

Before you do consider applying, it’s worth making sure your credit report is accurate. Go through it carefully, looking for discrepancies such as different ways of listing your address, and clerical errors, such as duplicate listing of accounts or closed accounts marked as open. Make sure everything is accurate and up to date and query with lenders anything that isn’t.

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