Payday Loans – to be avoided

watch your cash!

watch your cash!

Payday loans and Mortgages

The rise in the profile and usage of pay day loans in the UK has been dramatic over the past five years. It seems that every ad break on every free to air digital TV station features a thirty second slot telling you how money really isn’t a problem and all your problems can be solved with one phone call.

The obvious reason pay day loans are promoted so heavily is that they are highly profitable for the lenders. One study in 2011 suggested that some pay day loans will cost the borrower up to 60 times the lenders cost to provide them. In fact one major pay day lender has an APR of over 4,000% (if you don’t know what APR is – you won’t want to on that rate!).

The idea of pay day loans is simple, you borrow a little money today without fuss and pay it back (with interest) when you next get some cash in. Fine in principle, but the problem is that many of the clients drawn to these arrangements are using them because their cash-flow is unreliable or stretched. Their chances of making payments on time are minimal and late payments mean more lending and more interest. This equals more profit for the lender and more misery for the borrower.

Worrying trend

One pernicious development over the past 12 months has been the increase in potential mortgage applicants who have been told that taking regular pay day loans will improve the condition of their credit file.

This is not the case. Mortgage lenders get nervous if they see a pay day loan in your credit history. (each pay day loan generates its own entry on your credit file). To a mortgage lender, a pay day loan is a sign of someone trying to maintain a lifestyle beyond their means.

Conclusion

Our view is:

  • Do not use a pay day loan as a means to improve your credit file.
  • Particularly avoid pay day loans if you are considering applying for a mortgage
  • If you are struggling financially, avoid further lending and speak to your local citizens advice bureau
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