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Can A Payday Loan Stop You From Getting A Mortgage?

11th July 2012

One of the most common questions on our trust deed forum is whether it’s possible to get a mortgage in the aftermath of debt solutions such as a protected trust deed, sequestration, or debt arrangement scheme (DAS).

The answer is that there are no guarantees or set timetables, but re-establishing a positive credit record (partly through the responsible use of credit) may be a key part of being successful in the future. However, it would seem that there is one particular type of credit that those looking for mortgages after a Scottish trust deed (or many other debt solutions) should avoid like the plague.

We’ve written frequently about the dangers and problems associated with payday loans. They’re extremely expensive, offered with insufficient affordability checks (including to people still in trust deeds), and frequently turn into long-term financial arrangements despite supposedly being a short-term credit measure. Now, it would seem, using payday loans might stop you from getting a mortgage.

Mortgage lender, GE Money, offers home lending via mortgage brokers. GE Money is the type of lender that, if you are rebuilding your credit record after previous problems, might be able to offer you a mortgage. They are now rejecting mortgage applications from anyone that has used a single payday loan in the past three months, or anyone that has used two payday loans in the past year.

This mortgage lender seem to view payday loans as being a response to financial distress, a warning sign that the mortgage applicant might not have control of their finances. This may make the applicant seem like a very risky lending prospect. That’s clearly the last thing that you need if you have been working hard to rebuild your credit rating after completing a protected trust deed, sequestration, debt arrangement scheme (DAS), or debt management plan (DMP).

We very much doubt that GE Money is the only lender taking this view. According to Mortgage Strategy, credit ratings firms have been pressurized into creating a specific section on credit reports related to payday loans. This information is now viewable by members of the “Credit Account Information Sharing” scheme. How many lenders request this information when making lending decisions? Credit reference agency Experian apparently refused to comment.

It would therefore seem that using a payday loan, even if you repay it fully on time, might leave red flashing warning signals on your credit report that could alarm mortgage providers and other types of lenders.

What has the payday loan industry got to say about this? Quoted in the Mail, John Lamidy of the Consumer Finance Association (a payday lender trade body) says “The simple fact of taking out a payday loan isn’t a sign of anything other than you needed some money for a short period”. His view perhaps (you wouldn’t expect anything else!), but in the view of an increasing number of businesses it seems to be a sign of financial distress and reduced creditworthiness.

We therefore strongly advise anyone that is looking to obtain a mortgage after a trust deed (or any other debt solution) to avoid using payday loans. The potential attitude of mortgage lenders is one more good reason to avoid this dreadful industry.

Some ideas for people looking to get a mortgage after a Scottish trust deed, sequestration (bankruptcy), debt arrangement scheme (DAS), or a debt management plan (DMP):

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