Payday Black Marks

Payday loans are a booming business but now lenders are divided on whether anyone who has taken out one of these loans should be accepted for a mortgage.

Last week, a code of conduct was launched to help protect borrowers but huge questions have been raised regarding its effectiveness to reign in the rogues.

Bob Woodmansee, an independent financial consultant, is one broker who had a client with a payday loan declined for a mortgage, though he concedes the borrower also had some missed payments on his credit file.

However, some lenders would argue the two go hand-in-hand given payday loans can indicate a borrower is on the edge of their finances.

“My client said he had taken out the payday loans to build a better credit score. Crucially, or so I thought, all the loans had been repaid within 21 days or less of taking them out,” Woodmansee says.

“What was particularly frustrating was the lender gave an ‘accept’ to two separate decision in principle requests, only to decline the case following a random audit check.

“I never quite got a definitive answer as to whether the case was declined solely due to the payday loans but this was certainly the impression I was given in a phone call.”

The negativity around the sector is because a payday loan by its nature indicates a borrower is on the edge of their finances as they are aimed at the financially-stretched who need a few pounds here or there to tie themselves over for the month.

Typically, a payday loan customer borrows a few hundred pounds and has to pay the money back on their next payday or after a few weeks.

So they are designed to fill short-term money holes, hence the fact borrowers who have one are viewed with suspicion by lenders.

“Although many lenders will not specifically exclude those that have used pay day loans I think that it is fair to say it’s unlikely to improve the shape of a borrower’s application especially if the use is habitual,” says London & Country’s associate director David Hollingworth.

“If barely a month goes by without the applicant turning to payday loans it suggests they are having to bridge a gap between income and outgoings.”

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