But how often do brokers find payday loans an obstacle when assessing client affordability – or are payday loans and debt management plans an infrequent issue?
This week our panel of experts discuss how they support clients with a credit history listing debt management plans or payday loans.
Robin Purdie, director at Mov8 Financial, says that while a lender may only look for evidence of a payday loan up to the last 12 months, use of a payday loan at any point in a borrower’s life should be cause for concern.
Sebastian Riemann, financial consultant at Libra Financial Planning, outlines his experience of helping a recent client who had taken out a debt management plan.
Dominik Lipnicki, director at Your Mortgage Decisions, names lack of education as the most biggest concern for potential payday borrowers, adding that the mortgage market has a part to play in this process.
Firstly, it’s good to see the regulator taking firm action against companies of this nature.
We don’t see this crop up too often with clients, I’m pleased to say. I think that most people have cottoned onto the fact that payday loans don’t do wonders for your credit file.
I think from an advice point of view it comes down to two things – (1) credit score, i.e. the ability to actually get a mortgage, and (2) affordability in ‘real life’.
With regard to credit, most high street lenders will not look favourably on those with recent payday loan activity. So the first thing is to establish exactly how often these loans have been used and when they were last used. The mere mention of payday loan use would see me asking for a full credit file before proceeding any further with initial research, let alone a recommendation.
But sourcing a mortgage for a client who has used these loans is only one part of it. The much more important question is – if this client is using payday loans to tide them through till the end of the month, can they realistically afford a first mortgage or bigger mortgage? Yes, they may meet a lender’s affordability criteria, as per the lending calculator, but what is the chance of them getting into mortgage difficulty? Payday loans don’t scare lenders for no reason.
My advice to any borrower would be to stop using payday loans, if possible. Simple as that. And my advice to brokers would be to tread carefully…
Having recently come across a client who had utilised a debt management plan it has come to light that there is still a certain stigma attached to these. While the clients’ credit profile was intact, without any blemishes whatsoever, it appears that lenders simply do not like the look of these financial instruments. The affordability and credit worthiness was assessed and there were no issues. The assessment of the debt management plan was such however that each lender required a full explanation of the circumstances surrounding this, even though the client had never missed a payment on this or the debts this had related to. The plan was simply set up to manage the outstanding credit, much like a debt consolidation loan without the interest charges. Something which does in fact sound like a good idea and a very responsible approach if an individual is struggling to manage their existing debt prior to getting into financial difficulty.
The resulting decisions were peculiar at best. One large high street lender simply declined the application even though there was no issue identified. The debt management plan had in fact finished the month before the application was submitted but the lender was not comfortable with lending in these circumstances. A second high street lender was similar in their assessment but did in fact offer the loan eventually, where common sense prevailed in the end.
The client had to endure a very stressful application process even though she had acted in a mature and responsible manner when dealing with her debts. It seems unfair to discriminate against responsible individuals. Whilst most short term lending options and debt management plans can offer an insight as to the quality of the individuals credit worthiness, it would be irresponsible to tarnish each individual with the same brush. A lender with manual underwriting or a less rigid approach would always be preferred in such instances.
Over the last few years, it is fair to say that apart from miss-sold PPI, payday loans have received the most negative press, often for very good reasons. The regulator has tried to fix the problem, from a mortgage perspective however, payday loans can be extremely toxic.
For many mortgage lenders, this form of borrowing shows a desperation and lack of planning on the client’s behalf, both of which ring alarm bells. Usually mortgage lenders will decline a case with a payday loan on the credit file within at best, last six months, usually the last 12 months and sometimes ever. This could be for as little as £100, even if fully repaid 30 days later, as far as the lenders are concerned, this is extreme subprime territory.
Clearly, they may well have data that shows mortgage defaults soaring if payday loans were used and they will set their lending criteria to stay profitable. What is wrong is the lack of education for potential payday borrowers, with few knowing the dire consequences that their decision can have when it comes to their next remortgage or house purchase.
Many of the declined clients that we speak to are rightly distraught that they have used a legal means of borrowing money, paid on time and yet this has prevented them from fixing their mortgage or buying a new home. The market must do more to ensure that borrowers are making informed decisions.