Impact Of Payday Loans On Mortgage Application
- Jimmie Baillie
- Sep 11, 2024
- 4 min read
Introduction
It is important to consider the impact that payday loans will have on your mortgage application prior to applying for them. While they are an attractive option for those looking for fast access to finance, they should be carefully evaluated. In this article, we will discuss how payday loans work, how they can impact your mortgage application and the importance of an independent mortgage broker.
Payday loans are offered by a variety of institutions, from big banks to specialist lenders, they are characterized by their small amounts, short terms and high interest rates/fees. Given that payday loans do not require any collateral, they only require borrowers to show their proof of income. Once they have evaluated the borrower's income, they will lend a portion of their income with the expectation that the borrower will repay it within a 30 day period. If the borrower does not meet the repayment terms they are often dealt with large penalties and late payment fees as well as a very high interest rate.
Understanding The Risk Of Payday Loans
Payday loans can be seen to take advantage of a borrower’s need for fast access to finance by offering them quick access to finance. It is therefore crucial that borrowers understand the risks associated with payday loans prior to applying for one.
The short term of payday loans means they can be difficult to repay. Payday loans usually have a term of 1 month, allowing the borrower to pay off the loan with their next paycheck. Given the extremely short period of these loans it can be difficult for the borrower to accumulate the payback amount.
Additionally, once the loan has been repaid with the borrower’s paycheck, they will likely be left in a worse position the following month. With this in mind, payday checks can be seen as a trap for borrowers, hooking them into a cycle of debt.
Payday loans have very high interest rates, making them an exceptionally expensive method of finance. Due to the fact that payday loans require very little collateral and they are often a last resort for borrowers, lenders are able to charge interest rates in excess of 1000%. Payments are often taken from the borrower's account by means of direct debit, so it is important that borrowers have sufficient funds to repay the loan in their account.
In the case where the borrower is unable to repay the loan, or does not have sufficient funds in their account, lenders often impose hefty charges and late payment fees. It is therefore important to consider the interest rate, along with any late payment charges before you take out the loan. Another important factor to consider is the impact payday loans have on a mortgage application.
Important Factors For Lender's When Evaluating a Loan
A mortgage application consists of various stages, during which the lenders will evaluate the property, the borrower and the borrowers financial situation. The lender will then base their decision on this evaluation. There are some important factors for the lender to consider when evaluating a loan:
The Borrower: When evaluating the borrower, the lenders will look at information such as the borrower's date of birth, marital status, dependents etc. This information will be used to evaluate the applicant.
Financial Information: The lender will also review a wide array of financial information in order to get a clear picture of the borrower’s financial standing. This will include an in depth analysis of the borrower's assets and liabilities (savings, income, expenses and debt).
The Property: The lenders will also evaluate the property itself, this will include the property’s value, its address and its rent (if it is to be rented out). It is important that the property is in a suitable condition, as the property will be held as collateral, should the borrower fail to make the required payments on the mortgage.
Negative Impact
When evaluating a borrower's ability to pay back the mortgage, one of the things that the lender will analyze is the borrower’s outstanding debt. Payday loans could negatively impact a borrower’s mortgage application in several ways.
Payday loans can be seen by mortgage lenders as an indication that borrowers are unable to satisfy their financial commitments based on their monthly income.
Where payday loans have incurred late penalties and interest charges lenders will be hesitant to approve mortgage applications. The reason for this is that it is an indication that the borrower is unable to satisfy their current debt commitments, and would likely be unable to service an additional debt facility. It is important to keep in mind that lenders will not always view payday loans as an issue. For instance, where payday loans are used for once-off emergencies, and repaid on time they are not necessarily an indication of a borrower’s ability to satisfy their debt commitments.
Conclusion
In conclusion, while payday loans can appear an attractive option, their impacts should be carefully evaluated prior to application. With this in mind, it is important to consult an independent mortgage broker. Independent mortgage brokers can assist borrowers in evaluating the impact a payday loan might have on their future mortgage applications.
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