Funnily enough, some mortgage companies simply won't lend to anyone who is currently, or has previously taken out a payday loan. This is even if they have managed to pay it back on time with little or no problems. In addition to this, GE Money a sub-prime lender will also automatically reject those people who have taken out two or more loans within the course of one year.
GE is a mortgage lender who specialise in loans to individuals with a less than perfect credit history. In a statement a spokesperson said that "we are a responsible lender in an ever growing and challenging market. We review a plethora of data in order to make informed mortgage lending decisions and payday loans is some of the data we look at. If a mortgage applicant has previously had dealings with payday loan companies (however successful the transaction or arrangement was) we will not consider them for a mortgage with our company"
The spokesperson goes on to say that "these type of loans are indicative of financial stress and because we have to control our risk, are a big red flag for us" For this reason, it is highly unlikely that we will consider anyone who has used such a company"
Payday lenders is a term used to group all short term high interest lenders irrespective of whether loan payments are paid back on the borrowers next payday. They have in the past been accused of careless lending to vulnerable people.
Some of the interest rates are extortionately high. In fact if you take Wonga for example, they are one of the largest and most well-known of the 'payday lenders' and yet, they have an APR that stands at a whopping 4215%. They don't dissuade borrowers from rolling over payments meaning that before long the interest charges alone could well exceed the amount borrowed. At present the industry is under scrutiny by the Office of Fair Trading and tightening regulations. In addition, the Labour MP Stella Creasey stated recently that "payday loan companies are nothing more than legal loan sharks"
The payday loans industry does have a self-regulatory body in place and Russel Hamblin Boone spokesman for the self-regulating body the Finance and Leasing Association, (of which at present Wonga are their only paid members) said that the government have made it crystal clear that they wanted the loan companies to be more transparent and share data. The idea is that the more data that was shared between lender and borrower, the less reckless lending and borrowing there would be.
Mr Hamblin Boone also stated that GE Money's chastisement of the payday loan's industry is counterproductive. He went on to say that "by deterring payday lending companies from sharing information about potential borrowers to other lending companies they are in fact shooting themselves in the foot". "Further to this it's discrimination against individuals who have chosen to take their business away from the mainstay High Street institutions".
Other mainstream lenders including HSBC, Halifax, and Nationwide have not been so damming and denied the rejection of potential mortgage borrowers purely on the grounds of payday loans. A spokesman from HSBC stated that "it really makes no difference to us. If a potential borrower has outstanding debt, it will simply reduce the amount that they can borrow. This is across the board and not specific to payday loans".
However certain mortgage brokers who posted comments on the website 'Mortgage Strategy' stated that they had indeed put in applications for potential clients which had gone to the underwriters, only for them to turn the individuals down. One case in particular involved the Nationwide Building society who rejected a customer on the basis that they had taken out a number of payday loans even though they had all been paid back in full and on time.
A spokesman from the Nationwide stated that "payday loans may well have been a small factor in the refusal of the loan, but it certainly wasn't the only reason for a loan refusal. Obviously we do look closer at someone who has taken out a payday loan in the past, but as long as they have had no financial issues surrounding that loan, then we would still lend if this were the sole reason".
Another Consumer Finance Association Spokesman John Lamiday stated that "this information may even frighten consumers into thinking that having a sound credit rating doesn't matter anymore as people who have previously taken out payday loans may feel persecuted, should they wish to apply for longer term loans.