POSTED 26 November 2013

Payday loans, the hidden pitfalls

A recent Newsnight broadcast suggested that payday loans were harming peoples chances of getting a mortgage.  

It's an interesting subject as even though borrowers are paying them back it's quite clearly not something that a bank is going to be best pleased about particularly with the strict lending criteria that they now have in place.

Since the credit crunch banks have been under pressure to hold on to their money unless they’re lending to AAA credit rated individuals, with this in mind it's worth reminding people of some top tips to ensure that your credit rating does not damage your chances of getting the best mortgage products out there.

1. Do NOT take out a payday loan. These are deemed as quite desperate and banks would question why you are in such a situation that you couldn't wait until pay day and now you're paying back some money at a rate of interest never seen before (unless of course you borrowed from an east end gangster, with respect to them of course!)

2. Don't miss a credit card payment. This is a classic red flag for a lender, you may miss one and get away with it but regular missed will not look good.

3. Car loans. These will also be factored in, so be careful not to stretch yourself too far when lining up your next purchase. A nice new Porsche would look good on anyone's drive but if the monthlies don't stack up then lenders with run for cover. It goes without saying not to miss a payment.

4. Too much credit. This one is a grey area but the general rule of thumb is to take out credit so that you can prove your worthiness and build up your score. But at the same time taking on too much credit will make you more liable and your lender will question why you have so much debt and can you afford to pay it all back. 

5. Pay more than the minimum. Many people shop till they drop or even book holidays on their credit card, which is all well and good so long as you pay back the money, sitting there with a huge credit card bill and simply making the minimum payment each month isn’t going to look good. Always try to pay more than the minimum to show that you borrowed the money responsibly and have the means to pay it back quickly.