There are many reasons why people are discouraged from applying for payday loans, not least the four figure interest rates that they tend to attract, and sub-prime mortgage lender GE Money has added further fuel to the fire by declaring that they refuse mortgage applications from those that have taken out a payday loan in the past three months.
People on a low income can find it difficult to get credit and, in a lot of cases, this has led them to apply for payday loans. Unfortunately, such an emergency loan can attract exceptionally high interest rates and a failure to make repayments often leads to even greater repayment demands. This has led some borrowers to taking out multiple loans in a bid to try and recover from the situation. Many groups and lobbies advise against the use of these loans and for seemingly good reasons.
Another reason that has presented itself is the news that at least one mortgage lender considers the use of payday loans to be a negative sign.
GE Money, a mortgage lender that specialises in the sub-prime market, has said that they will refuse an application from anybody that has taken out a payday loan in the past three months.
This not only includes people that have struggled or failed to make repayments on the loans but even those that met the repayment schedule and didn’t struggle to pay back the loan.
Nationwide have also said that payday loans may have been a factor in calculating whether a person was a credit risk or not, but went on to say that they would not turn down an application based solely on the fact that a person has applied for a payday loan. According to MortgageRates.org.uk, HSBC have said that they do not differentiate what type of debt a person has. The site also points out that some lenders may be using payday loans as a sign that an individual is not a creditworthy borrower.
Fortunately, there are alternatives to using payday loans. A budgeting loan is a tax free loan made available by the government via Jobcentre Plus. Those on certain benefits are able to borrow up to £1,500 for any of a variety of reasons and the repayments, which are taken directly out of benefit payments, are made over a period of up to 2 years. If eligible, these Social Fund loans can prove essential help when borrowers need it most.
Read more about budgeting loan eligibility.