So do payday loans affect your getting a mortgage? The short answer is yes, a payday loan can affect your ability to secure a mortgage. Many mortgage lenders will decline applications from payday loan users, especially if these applicants have taken out loans time and time again. Even so, it is still possible to obtain a mortgage even if you have taken out a payday loan before.
Key Points:
- It is possible to attain a mortgage, even after taking out a payday loan.
- If you have failed to repay your loans promptly in the past, your credit score may have suffered. This will impact your chances of getting a mortgage as providers will carry out a credit check before offering you a loan.
- The average American mortgage borrower repays $1,274 per month on a 30-year fixed mortgage.
- Over 12 million Americans take out at least one payday loan each year.
- Payday loans should be used as a solution to urgent financial problems.
What Is A Payday Loan?
A payday loan is a high-interest, short-term loan that tides you over when you can’t cover costs between paydays.
Typically, payday loans are small loans, used to cover unforeseen but urgent costs. Many borrowers put their loans towards covering medical or dental bills or covering the costs of home or car repairs. In 2021, the average payday loan was $375. In fact, many states, including Florida, limit how much you can borrow to prevent borrowers getting excessive debt.
Payday loans are popular partly because of how accessible they are. With few and simple requirements, borrowers can receive their funds within one day of applying for a loan.
How Will A Payday Loan Damage My Chances Of Getting A Mortgage?
It is often stated that repaying loans promptly and fully demonstrates reliability, and therefore attracts lenders. While this behavior prevents your credit score from suffering, being a borrower of payday loans may deter other lenders from lending to you. This is because taking out loans implies that you can’t cover your costs without seeking help. This means that lenders may consider their money unsafe in your hands.
That is not to say that you shouldn’t make prompt and full repayments a priority. Failing to do so will negatively impact your credit score, making securing a mortgage much more difficult.
If a lender does approve you, they will likely offer you higher interest, making your mortgage more expensive than the average borrower’s. While the average APR on a 30 year fixed mortgage is 3.1%, mortgage providers have the ability to charge much higher rates of APR.
Mortgage Lenders View Your Credit History When Assessing Your Application
When you submit an application to a lender, they will view your credit history to understand your financial habits, and how reliable you are. For instance, if you have taken out loans, they will look at whether you have paid them back fully and on time.
They will also consider how frequently you have relied on loans. If you took one out years ago, it is unlikely to severely impact your chances of securing a mortgage now. This is why it’s best to avoid loans; if lenders know you have a current habit of taking out loans, they may conclude that you won’t make repayments on time, or will be overstretched with loan repayments alongside mortgage repayments.
How Long Does A Payday Loan Appear On My Credit Record For?
Your loans and repayments will appear on your credit record for six years. This is why it is only recommended to take out a loan if you urgently need it; the older the registration date, the less impact it will have on a mortgage application. In a similar vein, you should always make it a priority to make repayments on time and as agreed in your contract. The later repayments are made, the longer they will be visible on your credit record, and viewable by lenders.
How Can I Help My Chances?
Once you have a payday loan under your belt, you can’t take that back. What you can do – which could help you – is ensure you pay all of your debts back on time. This applies to payday loan repayments, but also to paying off credit card debt promptly, making phone contract payments in a timely manner, and not letting bills go unpaid.
These habits will set you on your way towards a strong and attractive credit score. There are further tips on improving your credit score here.
Indeed, when applying for a mortgage, consider how much you truly need. The smaller your request, the more likely a provider is to approve you. If you have a rocky credit history and are requesting an unnecessarily sizable mortgage, it is likely you will be declined.
