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A study by the BBC has shown that people who have previously taken out a payday loan are far more likely to be declined a mortgage, irrespective of their ability to pay these back.
This almost unanimous correlation has been publicised following the recent decision by George Osborne and the FCA (Financial Conduct Authority) to cap fees and interest on these payday loans by 2015, in an attempt to reduce the debt deficit. The payday loan industry in the UK alone has exceeded a billion pounds worth, the last 4 year period being the most active. The most infamous names in the industry are Wonga, QuickQuid and Sunny; all offering a typical short term loan intended to be paid back within a few weeks of the customer’s ‘payday’. However, many of these loans are approved without the required checks being made to even see if the borrowers are able to repay their loans. Obviously, this recurring cycle cannot continue the way it is going – or we could see a repeat of a sub-prime type crisis within the payday loan industry.
So the new cap seems to be a welcomed approach both from a borrower and lender perspective – making rules clearer and warning borrowers of the impending consequences of taking out such a loan. It does not, however, solve the issue of adverse credit ratings leading to mortgage applications being declined for these short term borrowers.
Let’s take a hypothetical situation – A 29 year old woman is unable to get a mortgage on a relatively small property as her payday loan from 3 years ago is still on her credit record. Mortgage lenders have seen her modest £300 loan from a payday institution as an indication that she would struggle to repay her fixed monthly mortgage, even though she paid her debt back before the stated date.
We think it’s ridiculous how such a small previous loan can have such a long-term impact on your credit rating, and the caps will not directly help to alleviate this situation. Although we would like to challenge the preconceived ideas about payday loans, this is not a very realistic goal, especially in the near future. The industry is not one that is sustainable and is quite a worrying issue for people who feel they have no other choice. We feel that people should only use payday loans as a last resort in today’s economy – utilising resources from friends, family, credit unions and building societies are a much more reliable and sustainable form of gaining credit without the long-term consequences.
What are your opinions? Leave comments below.
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