Yes, to some extent, having recent or active payday loans open can impact your chances of being approved for a mortgage, but car loans are likely to be less strict.
Of course, if you are purchasing a home or car outright in cash, there is no concern over whether you have or have had payday loans in the past. But if you are using finance such as mortgages or auto loans, this is where having a payday loan on your record could be tricky.
Having payday loans could assume that you are financially stretched and are living pay cheque to pay cheque and some mortgage lenders will be very cautious when lending money to you because of the stigma attached to this product. Whilst some mortgage lenders may take a view and be a bit more flexible, some might say no outright and you may need to find other specific mortgage lenders or use a broker to help you find the right option.
When buying a car, the car dealership or car finance company is likely to be a lot more lenient, because there are often cars sold to people with bad credit (see loans for poor credit) – and it may be a matter of trying to find the right car deal, company or type of car that suits your budget and credit background.
Of course, there are factors that need to be taken into consideration including:
- Whether the payday loans are active or not
- How recent the payday loans were
- How well did you repay your payday loan
There is a difference if a customer has one or more active payday loans, because this is still assumes that they are living very cautiously and have a constantly need emergency cash loans. The size of the loan could be important too, since lenders might take a different view on loans of $300 or $3,000 – considering that both might be warning signs or not a cause for concern.
In addition, if the customer had a payday loan and paid it off successfully over 12 or 24 months ago, this could be deemed unimportant in the scheme of things. It is worth noting that payday loans disappear after 7 years from your credit record.
The status of the payday loans repayments is also essential, including whether they were paid off on time or if they went into arrears and it took a long time for them to be paid back or if they are still outstanding. Someone with a consistent record of paying off payday loans and this is backed up by a fair or good credit score could be deemed as low risk, but a customer with a habit of missed repayments and bad credit is not going to be desirable for buying a home or car.
I Have Taken Out Payday Loans in The Past and I Want a Mortgage Now – What Should I Do?
Use more specialist mortgage lenders – Whilst Americans most well-known and famous banks are going to be more strict with their lending criteria, there are a number of private lenders, institutions and challenger banks that have emerged in the last decade and who are more willing to take a view on people’s different credit histories, backgrounds and this includes those that might have used payday loans in the past. For instance, you might look at someone like Rocket Mortgages, Navy Federal Credit Union or CitiMortgages as alternatives to your big banks.
Use a mortgage broker – Mortgage brokers work very hard to find your a mortgage deal based on all different histories and criteria. They will be more up-to-date with the lending criteria and policies available on the market and they will be determined to get you a pre-approval, based on the fact that they only earn a commission if you are successful.
Look at other ways to strengthen your customer profile – If you have payday loans on your file and this is impacting your ability to get a mortgage, try find other ways to make yourself more attractive to lenders. This could include looking at ways to improve your credit score and taking the slow steps to build it up. Other options include showing a low amount of debt open, which could be achieved by paying off credit card debt, using debt consolidation or closing down cards and accounts that you do not need. On an employment level, having a stable job or career is always useful when applying for a mortgage, especially if you work in the public sector such as teacher, nurse, soldier.
Consider paying a higher deposit (if possible) – Even some mortgage lenders consider you to be less desirable because of previous payday loans, you can try to pay a higher deposit for your mortgage which often shows more commitment and is something that will lower your interest rates too. Whilst you may not have savings to use as a deposit, there are ways to release some cash or building up a savings pot so that you have a higher deposit in 1-3 years time.
Become a cash buyer – If you are a cash buyer, you will not require a mortgage and can certainly purchase a new house, even if you have had payday loans. Being a cash buyer can come from downsizing your house, using an inheritance or simply having enough savings to purchase a house (although we appreciate that this is tricky if you are used to using payday loans)
Do they have an existing mortgage? If you have an existing mortgage, using this information could be key to help you get your next one, despite the use of payday loans. How well you have repaid this mortgage is important and if you have kept up with repayments, this could improve your chances of approval for a new one.
Does Having a Payday Loan Affect Buying a Car or Getting an Auto Loan?
If you want to buy a car, first-hand or second-hand using cash, there is nothing to stop you from doing this and having a payday loan on your record will not impact this.
If you are using an auto loan or car finance, this is something that a provider might look into. However, mortgages are a lot more selective than car loans and almost everyone who can afford a car has one, so there is a lot more leniency here.
Most car dealers and financiers will not view payday loans too negatively unless you have a long history of missed repayments or have a huge dependency on payday loans. If you are still granted an auto loan with bad credit, you may simply be offered less favorable terms – in the form of paying a higher deposit and a higher interest rate, much like you could for any financial product for bad credit.