It is estimated that around three million people have taken out a payday loan since the start of the credit crunch. Now, it has emerged that mortgage lenders are refusing loans to people who have taken out such a loan - ending the mortgage hopes of thousands of first-time buyers. A report in the Daily Mail has found that "families forced to turn to the short-term loans are routinely being refused mortgages", even if they have paid them in full and on time.
So, if you're thinking of buying a property, should you think twice before you take out such a loan?
Short-term ‘payday' loans have grown in popularity over recent years. They let borrowers take out a short-term loan for a small amount, although the interest rates on such lending can be as high as 4,000%. Now, however, banks are refusing mortgages to people who have taken out a payday loan in the past - even if they made regular payments and have a perfect payment record.
Since January this year, many of the large payday loan companies have been sharing their customer's data with credit reference agencies. These are the same agencies that banks access to check your files if you apply for a mortgage. With more information now being available on borrowers, some mortgage companies are, according to the Daily Mail, "routinely turning down families who have taken out such loans - even if they have good payment records."
GE Money and Kensington Mortgages will automatically refuse a mortgage application to anyone who has taken out a payday loan and other lenders are expected to follow suit.
Marc Gander, founder of the campaigning Consumer Action Group, says: "People are not being made aware that their hopes of buying a home could be scuppered by a snap decision to take out a payday loan. There is a complete lack of transparency."
Keith Osborne from whathouse.co.uk says: "If you're considering taking out a payday loan, it's vital that you consider the ramifications on your ability to obtain a mortgage in the future. Use of these loans is increasingly likely to make you less attractive to potential lenders and will reduce your chances of getting the mortgage you need."
Richard Griffiths, spokesman for payday lending trade body the Consumer Finance Association, adds: "It is a poor assessment of an applicant's ability to meet their mortgage commitments purely because they have recently taken out a payday loan even if it has been repaid. Payday loans are designed to smooth the peaks and troughs of a person's finances and the vast majority of customers repay in full, on time, so taking a payday loan is certainly not a sign of financial woe and should not be seen as one."