Brokers are increasingly seeing clients with a history of using payday loans being turned down for mortgages, even when the loans were taken out years ago and are now fully paid off.
John Charcol says the problem is growing and there is a need for the payday lending industry to better inform borrowers about the potential impact taking out a payday loan can have on future mortgage applications.
The broker says it has seen a rise in the number of would-be borrowers who have either been declined a mortgage or offered a reduced loan amount on the basis they have used a payday lender in the past.
John Charcol product technical manager Simon Collins says this stance on payday lenders is mostly coming from major banks using automated underwriting processes which do not take into account individual circumstances.
Collins says: “It is one of those ‘computer-says-no’ scenarios. Lenders may not have a set policy on payday loans but it does seem that in a suspiciously high percentage of the cases we are seeing, you have a payday borrowing history in the background.”
Chadney Bulgin mortgage partner Jonathan Clark says he approached a high street lender on behalf of a client who, two years previously, had used a payday lender at university. Clark was told the lender would not consider applicants who have taken out a payday loan.
He says: “My concern is customers using companies such as Wonga are unlikely to realise that borrowing money from them and paying it back quickly could still have a detrimental effect on their ability to obtain a mortgage or other finance in future years. Why should a customer who borrows money and then pays it back quickly while adhering to the lenders rules then be penalised in the future? Surely this is a form of social and economic discrimination as these people are being treated differently to those who borrowed money from their bank or credit card provider.”
Of the lenders Money Marketing spoke to about how they treat payday loan history, only Barclays said it did treat payday loans differently to other types of financing.
A Barclays spokeswoman says: “With other commitments like standard bank loans, we would deduct the monthly payment from net income. But given the way payday loans work and that they are generally paid back in total within a month we deduct the total amount.”
Lloyds says it will consider all loans with more than three months’ payments outstanding as part of its affordability assessment, which may or may not include payday loans.
Royal Bank of Scotland and NatWest says payday loans will form part of the underwriting process but would reject an application solely on the basis someone has taken out a payday loan.
HSBC says it does not treat payday loans differently to other credit.
The Consumer Finance Association, a trade body for payday lenders that counts The Money Shop, QuickQuid and Cash Converters among its members, cites research from credit agency Experian which argues that taking a payday loan and repaying in full and on time can actually lead to an improved credit score, thereby helping to improve a borrower’s profile.
Collins says it is only in the last year or so that payday lenders have started to send data through to the credit agencies, and since then he has noticed the growing trend of mortgage rejections.
Association of Mortgage Intermediaries chief executive Robert Sinclair says: “From a consumer perspective, anybody who takes out a payday loan is clearly showing some financial distress and existing lenders will think these consumers may be maxed out.
“We are concerned about this from the consumer’s point of view, but the problem is use of payday loans may be something lenders legitimately need to take into account. Consumers need to be aware these loans can damage their ability to get a mortgage.”
Emba Group sales and marketing director Mike Fitzgerald agrees both the payday loan industry and the mortgage industry need to do more to flag up to borrowers that taking out a payday loan could hurt them further down the line.
Fitzgerald says: “Of course, when a lender conducts a credit search and looks at what sort of credit a borrower has had, some underwriters will see that someone has used Wonga or some other payday lender and that may colour their judgement.
“On the high loan-to-value cases it does not really take much to tip an application over. Most people will probably know or have an idea that using facilities like Wonga may have some effect on their credit score but I am not sure how many realise it could harm a mortgage application.”
Coreco director Andrew Montlake says: “Borrowers should be informed of anything that could affect their mortgage applications in the future, whether this is a history of payday loans or something as simple as being on the electoral roll. We need to educate people better so they are aware of the risks.”