Will a payday loan damage my chances of getting a mortgage?

The quick answer to the question to whether a payday loan will affect your possibility of getting a mortgage is, no, it won’t. Having said that there is a caveat; your chances of getting a mortgage will be spoiled if you misuse your payday loans by either not paying on time, rolling loans over or generally behaving irresponsibly with short term loans.

When you apply for a mortgage the financial institution will do a credit check and your credit history will show your credit history. Payday loans are short term loans and therefore run over a shorter period than other types of loan. They are also easier to obtain than most loans so while financial institutions may treat them the same way as other types of unsecured debt – negative only if repayments are missed – if you take out a series of them it would look as if you had taken out many personal loans in a short period.

If you had taken out many personal loans in a short period it is possible that you would be turned down for a mortgage and in the same way the financial institution you apply to for a mortgage would be suspicious if you have taken out a lot of payday loans in a short period.

Using a short term loan wisely should not count against you

A payday loan is certainly no barrier to you borrowing money for property. If you have a good borrowing record and take out the odd short term loan, paying it back on time, it is unlikely that the short term loan will count against you.

If, in the past, you have had many payday loans but your fortunes have since improved, your prospects of getting a mortgage will improve as time goes on. The problem arises when a borrower is reliant on payday loans to get them from month to month. This is logical because any financial institution will ask how you can pay back a mortgage if you are having difficulty in managing from month to month.

As with any loan missed or late repayments will count against you. The risk of this is somewhat higher with short term loans because the period in which it has to be paid back is short and the costs are high if the loan is rolled over.

Payday loans will not damage your chances of getting a mortgage but it is the circumstances that accompany their use that could be the problem. Banks may view these short term loans as one of the symptoms of financial difficulties which face an applicant and reject the applicant on that basis. The same would be applicable to people living on overdrafts.

According to some sources, after using a payday loan or excessively using an overdraft, it may be wise to wait for more than 12 months before applying for a mortgage.

Many payday lenders are of the opinion that by using payday loans wisely your credit rating can improve.