Overdrafts Are More Expensive Than Payday Loans

Payday loans have been heavily criticised in the media, charging representative APRs of anywhere between 1,000% to 6,000% before the FCA imposed a cap on these costs in 2015. This cap was placed to safeguard borrowers from being charged interest rates of over 0.8% a day.

Whilst the payday loans sector have received much negative attention in the press due to these charges, in reality, their costs are not far off from a bank’s overdraft fees, and can actually be considerably cheaper to use than an unauthorised overdraft.

Below is a table showing the cost of borrowing £100 from a payday lender compared to an overdraft facility:

 

Financial Product Cost for borrowing £100
Payday Loan £24
Overdraft (Authorised) Up to £30
Overdraft (Unauthorised) Up to £100

 

It’s important to note that these are examples of borrowing costs, and could vary depending on your provider and the details of your application.

 

What is an Overdraft?

 

what-is-an-overdraft

 

An overdraft is the amount you are allowed to go over your bank account limit. It can apply to both a current account and a credit card, and (when authorised) is agreed upon by the account provider and the account holder.

For example, if you have a credit card with a limit of £3,000, you may be given an overdraft of £1,000 which is an ‘authorised overdraft’ which allows you to borrow extra money if you need it for emergencies. However, this may come with charges.

Carrying on with this example, if you go over the £3,000 credit limit, and have an overdraft of £1,000, but continue to borrow, this will be using your ‘unauthorised overdraft,’ which can come with much higher fees. As per the table above, these can be considerably more expensive than a payday loan.

 

How Much Does an Overdraft Cost?

 

overdraft-cost

 

The cost of an overdraft will depend on the type you use (authorised or unauthorised) as well as the provider and your own personal details.

An authorised overdraft is based on the applicant’s credit score and their affordability (based on their expenses, salary etc.)

Unauthorised overdrafts are considerably more costly than authorised overdrafts because being ‘unauthorised’ you have not been approved to borrow this money or based on any checks – hence it comes with greater risk and fees from the providers.

The rates for overdrafts, both authorised and unauthorised, can vary considerably. However, one trend evident throughout the examples in the table is that the unauthorised overdraft fees are significantly larger than those that come with an authorised overdraft.

It’s not advised to use overdrafts as a long-term solution to debt problems. Similarly, overdrafts  should not be used for unnecessary purchases, and rather only be taken out when absolutely necessary, and only for a short period of time (e.g. genuine emergencies, broken boilers, problems with the car).

 

New Overdraft Restrictions

 

overdraft-restrictions

 

Due to the excessively high fees that can come from unarranged/unauthorised overdrafts, last year the FCA confirmed it was introducing restrictions on overdraft fees, stopping banks from charging additional fees and charges along with annual interest rates. Former Chief Executive of the FCA Andrew Bailey said:

“The overdraft market is dysfunctional, causing significant consumer harm. Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts, which are often ten times as high as fees for payday loans. Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges, that are both a result of and driver of poor competition.”

From April 2020, banks can now only charge “a simple annual interest rate” for those using their overdraft, without any added fees/charges.

You can read more on the FCA’s recent changes to overdraft by visiting this page.

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What Is a Business Interruption Loan?

Business Interruption Loans have recently been introduced by the UK government to help businesses struggling financially from coronavirus. These loans will be running from March through to September 2020, and can offer up to £5 million, interest-free for the initial 12 months of the loan.

Many businesses, and individuals, have needed to borrow money to get them through these uncertain times. Business Interruption Loan Scheme have been created in response to this need, offering struggling companies financial support to pay for staff, rent, leases, insurance and more.

These specific business loans are part of a scheme known as the Coronavirus Business Interruption Loan Scheme (CBILS), operated through the British Business Bank via over 40 different accredited lenders.

In order to encourage lending during these uncertain times, any loan providers taking part in the scheme are guaranteed 80% of the finance from the government, who will also pay any interest and fees on the loans for 12 months.

 

Who Can Apply for a Business Interruption Loan?

 

Business-Interruption-loan-Hospitality

 

Business Interruption Loans are for businesses who have been hit by coronavirus. Some of the strongest candidates for these loans are those who have been hit particularly hard by the pandemic, including those in the following industries:

  • Events
  • Travel
  • Hospitality
  • Aviation

However, businesses from others sectors are also eligible, so long as they have been financially impacted due to COVID-19, in addition to the following eligibility criteria:

  • Holding an annual turnover of under £45 million
  • Have been trading for a minimum of two years
  • Based in the UK

Whilst companies can apply for these loans from a range of sectors, there are some types of business that are not eligible for this finance, including public-sector bodies, banks and insurers, and state-funded schools (primary and secondary).

 

How Much Can You Borrow Through a Business Interruption Loan?

 

borrow-Business-Interruption-Loan

 

The amount businesses can borrow through the Business Loan Interruption Scheme will depend upon the type of lending they apply for. The scheme offers unsecured loans of up to £250,000 and secured loans of up to £5 million. For a secured loan, businesses will have to secure a valuable asset as collateral such as property, vehicle or similar.

The CBILS is operated through the British Business Bank via over 40 accredited lenders, including high-street banks, challenger banks, asset-based lenders and smaller specialist local lenders. These lenders can provide up to a maximum of £5 million, and offer the following forms in which to provide the finance:

  • Term loans
  • Invoice finance
  • Asset finance
  • Overdrafts

The British Business Bank state the following for finance terms:

“For term loans and asset finance facilities: up to six years. For overdrafts and invoice finance facilities: up to three years.”

 

What Can Business Interruption Loans Be Used For?

 

Business-Interruption-Loan-uses

 

A loan from the Business Loan Interruption Scheme can be used for a variety of different business operations, including the following:

  • Paying off any outstanding debt
  • Paying for staff
  • Paying rent
  • For licensing and legal costs
  • For accounting costs
  • To help keep with contractual obligations

These loans can also be used for advertising and PR activities, however these must be related to overcoming the challenges that the business have faced due to COVID-19.

 

How to Apply for a Business Interruption Loan

 

applying-for-Business-Interruption-Loan

 

You can apply for a Business Interruption Loan from the CBILS via the bank you’re already using. Alternatively, you could also apply through a variety of other finance institutions taking park in the scheme. You can view the list of accredited lenders involved in the CBILS here.

You must prove that your business has been impacted by the pandemic in some way and there are also some things you can do to boost your chances of approval. These include having a good or fair credit score, having a valuable asset in which to secure onto the loan (e.g. property, inventory, a vehicle), and having a profitable business.

You can also improve your chances of getting a Business Interruption Loan by having a business with little debt/debt problems (e.g. avoiding CCJs or bankruptcy).

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A Guide to Borrowing from Family and Friends

Borrowing money from family and friends is actually the most common form of borrowing in the UK and typically occurs between parents and children, siblings, spouses and close friends.

The main advantage of borrowing from loved ones is that it surpasses any credit checks and usually does not come with any interest or terms.

Borrowing between close relatives can be closely linked to gifting, such as buying your children a new car, paying for holidays or weddings. But borrowing between family and friends can also be during times of distress including debt problems, business cash problems and funerals.

When executed well, borrowing between family and friends can be very effective, but there is a close line between this and causing resentment and sometimes falling out with loved ones. With this in mind, The One Stop Money Shop offers its guidance on borrowing between family and friends.

When would you borrow between family and friends?

  • Buying a house and making renovations
  • University
  • Rent
  • Starting a business
  • School fees and education
  • Holidays
  • Going out and leisure
  • Medical or health
  • New car or repairs
  • Debt trouble
  • Funerals

 

borrowing-from-friends

In terms of volumes, borrowing between family and friends is the most common form of borrowing

The role of loan agreements between family and friends

Whilst giving a friend a tenner at the pub certainly does not require a legal agreement, or repayment for that matter, there is a role of having loan agreements for larger amounts or if any form of interest or repayment is expected.

Certainly when it could be a commercial or business arrangement (maybe where the person lending is getting some form of share or equity) – writing down some clear loan terms can ensure a smooth process and reduce the risk of backlash or turning sour.

Basic loan terms could include:

  • Names, dates, addresses
  • Loan amount
  • Interest (if any)
  • Expected repayment dates
  • Names of parties involved and witnesses
  • Implications for non-repayment
  • Purpose of the loan
  • Signatures

Set a clear repayment date

It is very easy for any loans or money borrowed between friends and family to run continuously and repayment is eventually forgotten.

But, to ensure a good relationship, goodwill and keep the door open for future engagements, it is worth setting a clear repayment date, either contractually or verbally.

 

borrowing-from-family

Family members will not usually charge interest, so it is important to not abuse their trust

Do not abuse the position of trust

The borrower will usually borrow money from their sibling or parent without any prior credit checks, income checks or security (collateral). Essentially, the loan is based on just trust.

As the person borrowing, it is important that you do not abuse this and showing an ability or willingness to repay will always hold you in high esteem.

What to consider when lending to someone else?

It is hard to say no to a close friend or family member when they need to borrow money, but importantly you have to ask yourself whether you can afford it.

In the event that the person cannot repay or will not repay at all – is this an amount that you can live without?

If you have a limited income or are living off a pension, should you decline the offer?

Having a budget and an idea of your financial position before lending out money is advised.

Have you considered the alternatives?

For the individual looking to borrow money, there are alternatives to asking your parents or friends. Whilst payday loans should be used for emergencies only, there are other low cost options such as using 0% credit cards, using an authorised overdraft, taking payment holidays from your current mortgage or car finance arrangement, applying for money through a work scheme or your local credit union.

How Many Payday Loans Are Taken Out Every Year?

More than 5.4 million high-cost short-term credit (HCSTC) loans were taken out for the year up to the 30th June 2018.

Last year, the FCA published a report into the HCSTC lending market, which was based on data that was submitted by UK consumer credit firms. This was the first time the UK’s financial watchdog has published regulatory data with the help of other lenders, providing a strong overview of the industry.

 

What Is a HCSTC Loan?

High-cost short-term credit loans are a type of unsecured loan. As the name suggests, these types of loans are taken out for a short period of time, and have a high annual percentage interest rate (APR) of 100% or above. HCSTC loans are typically repaid fully (or substantially) within 3 to 12 months.

A payday loan is a typical example of a HCSTC loan, being an unsecured, short-term loan with APRs commonly in the triple digits. This loan was originally created to help cover a borrower’s finances before their next payday, hence the name “payday loan”.

 

FCA Findings on HCSTC Loans

As well as finding that over 5.4 million HCSTC loans were used in the year up to the 30th June 2018, the FCA’s report also suggested that lending volumes increased between 2016 and 2018. The figure below illustrates the increase in HCSTC loan lending volumes during this period:

 

loans-HCSTC

 

As borrowers may have taken out more than one loan, these results do not show anything regarding the number of borrowers for these loans, which may subsequently be lower. The FCA state in their report:

“We do not collect data explicitly on the number of borrowers in PSD [Product Sales Data] but we estimate that for the year to 30 June 2018 there were around 1.7 million borrowers (taking out 5.4 million loans).”

Interestingly, whilst the number of active firms throughout this period decreased by more than 15%, this did not lead to a reduction in lending.

The FCA also found that the average APR for HCSTC loans throughout this period was stable, the mean value hovering around 1,250% APR.

Whilst the APR for a loan has remained stable throughout these two years, borrowers should be aware that it will vary depending upon the loan’s details – i.e. those with a longer repayment period may have lower APRs in comparison to those with shorter repayment periods.

 

Which Areas Take Out Payday Loans the Most?

Central and Greater London were also shown to have the highest number of loans, accounting for 15% of the HCSTC market during July 2017 – June 2018. This was closely followed by 13.8% from the North West, and 12.1% from the South East.

The lowest total number for these loans per area detailed on the FCA’s table (shown below) was Northern Ireland – having only 109,900 loans throughout this period, marking 2.1% of the market.

 

table-locations-HCSTC-Loans

 

When contextualising these results on the total number of loans between the period of July 2017 – June 2018, the FCA found that the North West had the biggest number of HCSTC loans per 1,000 adults – this being 125 loans per 1,000 adults.

Interestingly, whilst the North West had the largest number of these loans per 1,000 adults, the value of loans throughout this area was considerably lower than other areas of the UK, being £234 compared to UK average of £250.

 

HCSTC-loans-chart

 

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What is included in a loans management software?

The majority of UK lenders use loan management software which allows them to manage the entire loan and customer process from start to finish – including the application, underwriting, payment and collection process.

Lenders and brokers may have their own systems in-house or use a licensed product and pay a monthly management fee.

With so many different aspect involved with running a back-end system for payday loans or short term loans, The One Money Shop has provided an overview below.

Customer journey

This refers to the application form, typically using an iFrame, and includes a range of fields and questions that a customer must fill in to determine their eligibility.

The provider or broker may make amendments to the application form whether it is the number or fields asked, layout or pages and this will be to maximise conversions and reduce the drop-off rate.

Once completed, this information is fed into the larger system and a number of automated checks will be carried out (sometimes hundreds of checks) to decide if the person is suitable for a loan or not.

Leads management

For customer service teams that are used to processing numerous applications per day, they will use a loans management software to log in every day and process any new and existing applications. This could be useful to manually review any applications or ask for more information (e.g payslips), sending emails or making phone calls.

The leads interface is something that may be accessed by multiple people at once and every action is assigned to that particular individual to ensure quality control.

Underwriting and scoring

When an application has been submitted, it will go through underwriting which consists of the lender’s or broker’s decision scoring and will determine if the person can receive a loan and how much for.

For short term lenders, they may carry out anywhere between 500 to 1,000 automated checks which covers things like age, address, marital status, income, affordability and bank details. This will usually produce a final score and if it meets the certain score based on the lender’s requirements at that time, they can be provisionally approved or instantly funded.

A loans software will have the ability to make tweaks to the underwriting process and scoring, since this is something that lenders will regularly adjust and make changes to manage the rate of funding and risk they can take on.

An underwriting system will also connect to other third party services such as credit reference agencies, used for carrying out credit checks, anti-money laundering and bank checks.

Triggers

Triggers involve sending automated emails and SMS to customers through the loan process. This could include sending a PIN code and email to electronically sign the loan agreement, sending follow-ups to complete the application and sending payment reminders.

When you are processing hundreds of applications and repayments on a daily basis, a loans management software can help you improve conversions and collections in the most effective way possible.

Payment processing

A loans software will allow you to connect your company to different payment gateways and your bank so that you can send funds to customers and collect repayments.

Lenders will use different payment providers such as Stripe and this could be based on things like functionality and fees.

Collections

Collections are key to any loans business and a loans software will be able to schedule all the repayment dates and automatically collect from the customer’s bank accounts on the specific dates. This will be followed up with emails or an SMS to confirm payment or follow up on any missed repayments.

The majority of UK lenders use a process known as continuous payment authority which is a form of direct debit which simply collects from the customer’s account when their repayment is due. It is a form of recurring payment and means that the customer just needs to have money in their account for collection, but does not need to do anything manually like making a BACS payment or phoning in. For more information, read our guide on how repayment works.

Loans documents

Loan documents stating the terms of the customer’s loan agreement can be automatically generated based on their name, address and loan details.

This will be sent to the customer before they proceed with the loan so that they are fully aware of the loan rates and their obligations. They will need to sign this electronically in order to proceed.

This means that the provider can also pull up any loan documents and agreements at any time.

Notes

Customer service teams will be able to use the loans management software to make any important notes and input any interactions that they have had with a customer. This could be a phone call or email which states that they need to change their bank account details, repayment date or if they wish to make an arrangement to pay.

The ability to add notes is very useful from a customer service and quality perspective, allowing each member of staff to be informed and up-to-date on each customer case. It is also beneficial for compliance purposes and to ensure that you have all the relevant information on a customer’s transactions.

Security

A loans management solution will include strong security and encryption of data so that it protects any customers and their sensitive information such as address, income and bank details.

When Should You Use a Payday Loan and When Should You Not

Payday loans are a type of unsecured, short-term loan that should only be used in certain situations. This type of loan was originally developed to help those who were financially struggling and waiting for their next payday – helping to keep them on top of certain payments before receiving their next paycheque.

Payday loans can be a great way to finance various situations, however, there are some circumstances where they should not be used. Below is a table detailing some of the main situations where this type of loan should and should not be used:

 

When you should use payday loans When you shouldn’t use payday loans
Emergencies To pay off another loan
Short-term expenses For shopping and other luxury goods
When you know you can pay the loan back When you don’t have a stable income

 

Payday loans should only ever be used in the right circumstances, being a quick and easy solution to a short-term financial problem. It’s important not to become reliant on payday loans, and to avoid having them for long periods where possible.

 

When You Should

There are a variety of different circumstances where a payday loan would be useful, including paying for unexpected emergencies. For example, if your boiler breaks or your car has to be taken into the garage, you will probably need these fixed urgently, but may not have the cash to do so until you get paid.

A payday loan can help provide the funds you need on a short-term period, with repayments never usually lasting over 12 months.

You should also only use this type of loan for short-term expenses, like a boiler breaking or taking the car to the garage. Some people also use payday loans to pay for bills, however this should only be for a short-term period, and borrowers should not rely on the loan to keep up with their regular, monthly expenses.

Payday loans should also only ever be taken out when the borrower is confident they can make repayments. If you struggle to keep up with repayments or default on the loan, this could complicate your financial situation further, adding extra fees whilst also damaging your credit score in the process.

 

When You Shouldn’t

You should never use a payday loan to pay off another loan. Payday loans usually come with an APR in the triple digits, hence they are part of the high-cost short-term credit (HCSTC) category. Using a payday loan to pay off another loan can cause a spiral of debt that is difficult to climb out of.

You should also never use a payday loan to go on shopping sprees, fund holidays or pay for other luxury goods. This can encourage bad habits, and also cause further debt problems.

Additionally, you should not take out a payday loan unless you have a stable income, or know exactly how you’ll be paying off the loan. It’s vital to budget accordingly, to ensure loan repayments are made.

Keeping up with the repayments on a loan will keep your financial situation from worsening, as well as keeping your credit score unharmed. In fact, keeping up with the repayments on a loan can actually improve your credit score, as it builds up a good history of borrowing.

You may want to help a friend or family member that has been unable to get a payday loan, however, you should never take a loan out for someone else. The legal responsibility of this loan will fall on you, meaning that if repayments are not kept up, you will be liable for any late fees and impact to your credit.

 

What Are the Alternatives to Borrowing a Payday Loan?

Whilst payday loans can help borrowers stay financially afloat during difficult periods, it is important to know that there are always alternatives available.

Borrowing from family and friends will always be a safe form of borrowing and will never run the risk of late fees, heavy debt or repossession – and it can often be fast and interest free.

For very low cost loans, you can always look at your local credit union which offers rates from 26% APR and no default or late fees. Using a credit union can take up to 7 days for funds to clear, but assuming you are a member of the local church or work in the public sector of that community, they can be one of the cheapest forms of borrowing available.

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What are budgeting loans?

A budgeting loan helps people on low incomes to pay for an unexpected expense or essential items. This type of loan is only available to people who meet a certain criteria, which we discuss below.

A budgeting loan is interest-free, making it a much cheaper payday loan alternative for those on low incomes.

 

What can a budgeting loan be used for?

Budgeting loans can help borrowers with a variety of different things such as:

  • Repaying purchase hire loans
  • Maternity costs
  • Funeral costs
  • Rent in advance
  • Moving house associated costs
  • Travel costs in the UK
  • Security in the home
  • Home improvements
  • Home maintenance
  • Costs that are linked to getting to a new job
  • Furniture
  • Household items such as washing machines
  • Clothes or footwear

 

Who can apply for a budgeting loan?

Borrowers will need to meet certain criteria to be eligible for a budgeting loan.

You will need to be a recipient of one of the following benefits:

  • Income support
  • Income-based Jobseeker’s Allowance
  • Pension credit
  • Income-related Employment and Support Allowance

You also need to make sure that you have been claiming one of these benefits for a minimum of 26 weeks. You do not necessarily need to be receiving this benefit consecutively, but there cannot be a break of more than 28 days in total.

 

How much can I borrow with a budgeting loan?

You can borrow a minimum of £100 with a budgeting loan. Regarding the maximum budgeting loan amount, this will be dependent on your individual circumstances. For example:

  • If you are single, the maximum amount you can borrow is £384
  • If you are part of a couple, the maximum amount you can borrow is £464
  • If you have children, the maximum amount you can borrow is £812

There can also be additional factors impacting your budgeting loan amount, including:

  • If you have existing Social Fund loans
  • Are paying an existing budgeting loan
  • If you have savings over £1,000 (this rises to £2,000 if you are aged over 63)

 

How do I pay back a budgeting loan?

With a budgeting loan, you will only need to pay back what you owe, with no additional fees – so essentially it is interest-free

These loan repayments will be taken out of your benefits automatically. The deducted amount will be calculated on an individual basis. This includes taking into account the benefits you receive, current income and what you can realistically afford to pay.

In the majority of cases when budgeting loans are granted, you are required to pay it back within 2 years.

 

How can I apply for a budgeting loan?

To apply for a budgeting loan is a relatively straightforward process. Once you have ensured you meet the relevant criteria for a budgeting loan, you can apply online via the GOV.UK website. Make sure you have the documents ready to prove you are an eligible applicant.

You can also download and print the Form SF500 from their website, or ask for the form at any local Jobcentre Plus in the UK.

job-seekers

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What are the regulations for the payday loans industry in the UK?

The regulatory watchdog for the payday loans sector, the Financial Conduct Authority, implemented a wave of new regulation from 1st January 2015. In fact, it is estimated that the FCA’s new rules have saved payday loan borrowers approximately £150 million so far.

Prior to 2014, the payday loans industry was  self-regulated and many companies were failing to meet even the basic loan standards set for them.

This included failing to implement adequate affordability checks to ensure borrowers could afford the loan amount they were applying for. Many payday loan companies also had sky-high interest rates for their loans and failed to make clear to customers the possible risks involved with late or no repayments.

The FCA wanted to create a fairer system that better-protected payday loan customers, some of whom can be the most vulnerable in society. This included new payday loan regulations such as:

  • A price cap of 0.8% on the daily interest rate
  • No customer will end up paying double for their loan
  • Default fees are capped at £15
  • Required to show representative APR next to each call-to-action button
  • Each lender must provide a link to a price comparison website (PCW)
  • Every payday loan company needs to be fully authorised

 

fca-price-cap

 

Price caps at 0.8%

The FCA introduced price caps on payday loans so all payday lenders must ensure that borrowers will never pay more than 0.8% per day.

 

A cap of 100% of the loan repayment amount

New FCA regulations also state that lenders in the payday loans sector must have a cap of 100% on the total loan repayment amount. This has had a significant impact on borrowers, as it means that they will never be in a situation where they end up paying double for their loan. Before this ruling, it was common for many to spiral into debt as the loan increased considerably in size.

 

Default fees at £15

Previously, payday loan lenders had free reign to charge whatever they wanted for missed payment fees. It meant the cost varied considerably from lender-to-lender and often caused more debt for those already struggling to make ends meet.

Now, lenders can only charge a fee of up to £15 for missed payments on a loan.

 

Representative APR requirement next to each CTA

Payday lenders are now also required to show the representative annual percentage rate (APR) prominently on their websites next to any call-to-action (CTA). This is to help make it easier for customers to understand fees, charges and what they can expect to pay back for the loan. Previously, the industry was criticised for failing to make the associated costs transparent for their customers.

 

Providing a link to a price comparison site

Following an investigation by the Competitions and Markets Authority (CMA) that was released in February 2015, the FCA implemented new rulings about being featured on price comparison sites – to give customers a full market view when they apply.

All payday lenders are now required to show at least one price comparison website (PCW) on their site. It must be displayed prominently, and not hidden away from view. This is to make it easier for customers to compare other prices in the market. See our example below:

pcw-example

 

Payday loan authorisation

All direct payday lenders now require FCA authorisation before being able to lend to borrowers. This takes a minimum of 12 months and involves a thorough check of the business and its plan, before they can start trading.

The result of a strict authorisation process has subsequently seen a sharp drop in the payday loan companies who continue to operate in the industry. In 2015, there were over 150 lenders, in 2020, they are less than 50.

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Does a payday loan affect your chances of getting a mortgage?

No, a payday loan on file will not impact your ability to get a mortgage. It is a common concern that is raised amongst borrowers who fear that a payday loan on their credit record could be looked upon negatively when they want to apply for a mortgage at a later date. But it is not the case.

 

Why are there concerns that payday loans could impact getting a mortgage?

Those applying for payday loans online are often considered to be financially stretched and in need of desperate funds. Whilst this may be the case for a percentage of customers, this does not consider the large proportion who use payday loans for emergencies or to cover temporary shortfalls of cash.

However, mortgage lenders and brokers treat these loans in the same way they would for any other kind of loan such as a personal loan.

 

What mortgage lenders and brokers care about

The mortgage sector looks at finance in the same way as other types of unsecured debt, such as credit cards or personal loans.

What matters most to mortgage lenders and brokers when deciding to approve or decline an application is how you previously managed your debt.

 

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For example, as with any other type of unsecured debt, what will be assessed is your repayment history such as:

  • Did you always pay on time?
  • Did you miss payments?
  • Did you default on the loan entirely?

All these factors have a much bigger impact on whether your mortgage application is approved or not. Lenders want to see you can repay loans on time.

 

What impacts your chances of being approved for a mortgage?

It is worth noting that your loan repayment history is not the only determinate of whether or not you are approved for a mortgage. Other important variables include:

  • Affordability checks: lenders carry these out to ensure you can afford to take out the loan. If after taking into account your income,  credit history, and future expenses it suggests you would be put into financial difficulty, then a loan is unlikely to be granted
  • Linked to someone with a poor credit history: if you have a good credit score but your partner doesn’t (and you have linked accounts) this could be problematic. See how do credit checks work for more information.
  • Age: a person’s credit score is key to being approved for a mortgage, and when you turn 18 you start with zero credit history. Lenders need to be confident you have experience of paying a loan back.
  • Missed loan or credit card payments: this will affect your credit rating as well as your chances of getting a mortgage. If you appear as high-risk to lend to, then your chances drop.

 

How to improve your chances of being approved for a mortgage

There are a number of ways you can increase your mortgage approval chances:

  • Employment status: working for the same company for a number of years can work to your advantage. Lenders will be looking for successful applicants to prove they have a stable, regular income and this would be evidence of that
  • Good credit rating: lenders like low-risk applicants. A good credit rating will increase your chances of being approved.
  • Improving your credit score: you can improve your credit score by making sure you are on the electoral roll and paying off any outstanding debts you have
  • Prompt repayments: making sure that you pay back any existing loans or credit cards on time will be considered by a mortgage lender.
  • A guarantor: in some cases, you may be able to have a guarantor on your loan and can be particularly useful for younger people trying to get on the property ladder.

 

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What loans are available for the self-employed?

Applying for a loan is made trickier when you are self-employed. This is because one of the main things lenders will ask for from you is evidence of income in the form of payslips. As you are not employed by someone, you will not be able to provide these.

In addition, the fluctuation of income on a month by month basis is another reason why lenders are less likely to approve you for a loan if you are self-employed. If the amount you receive in income varies monthly, this makes it far harder for a lender to carry out affordability checks. These are important, as it determines whether or not you are in a financial position to be able to afford a loan. It also indicates to the lender the level of risk in providing you with a loan.

 

Is it possible to get a loan if I am self-employed?

Yes, but with limited options available. Typically, with these lenders, you will need to have a good credit score (there are ways to improve your credit score if it is not currently up to scratch). You will also need to make sure you meet the specialist lenders’ affordability checks and provide supporting documents.

 

Loans available for the self-employed

If you are self-employed, the main options available to you are as follows:

  • Payday loans
  • Secured loans
  • Guarantor loans
  • Personal loans
  • Business loans
  • Credit unions
  • Bank loans

 

Payday loans

If you want to apply for payday loans, you need to demonstrate a regular income and salary. So if you are self-employed and have been for several years, this will strengthen your case over someone who has only recently started working for themselves and does not have a history of stable income.

For people looking for payday loans up to £1,000, the lender wants to ensure that you can repay your loan without falling into financial difficulty. You may be required to show proof of income through a payslip or bank statement and if you are self-employed, they may require up to 3 months worth of information.

 

Secured loans

A secured loan may be for you if you are having difficulty providing the needed documented income to a specialist lender, or simply do not have adequate employment history to apply for an unsecured personal loan.  With a secured loan (a type of personal loan), the total amount of equity in a property that you own is used as security against the loan amount.

Typically, because of the level of collateral involved, a secured loan can offer you lower interest rates than you would need to pay on a regular personal loan.  However, keep in mind that if you are unable to keep up with a repayment plan on your loan, you risk losing your home altogether.

Guarantor loans

Another loan alternative if you are self-employed is a guarantor loan. These types of loans work by asking a third party (typically a close friend or family member) to be the nominated guarantor for your loan. The person you choose will need to have a strong credit score, and also usually a homeowner as well, in order to be approved.

The risk of lending to you is mitigated through the guarantor, who enters a legally abiding contract to pay the loan back if you are unable to.

 

 

It is extremely important that the nominated guarantor is aware of this before signing the contract, as after the initial 14-day cooling-off period, it is no longer possible for a guarantor to remove themselves from the contract.

Another thing to remember is the guarantor loans typically have higher rates of interest than the typical standard personal loan.

Personal loans

With this kind of personal loan (unsecured), it is possible to apply without having to provide some kind of security for it in the form of your home, vehicle or other high-value possession. Personal loans of usually favoured for those with good credit scores and you can receive some of the lowest rates around, from 3%. If you have a fair or poor credit rating, these types of loans may be more difficulty to obtain or come with higher rates of interest.

 

Business loans

It is also possible for you to apply for a business loan if you are self-employed, providing that these funds are being used in order to support your company. The lender will first check your business accounts to make sure that it makes sense to lend to you.

The amount you can borrow is typically based on your annual revenue and other factors such as credit status, affordability and any other outstanding debt that you may have.

A business loan can be secured, so you can use stock, your premises or unpaid invoices as collateral – or you can apply purely on an unsecured basis, primarily based on your income and affordability.

 

Credit unions

Credit unions are located all around the country and act as non-profit organisations. If you are looking to borrow small amounts under £1,000, this can provide extremely low rates at around 26% and there are no default fees. Whilst you can be self-employed as part of the eligibility criteria, you may need to be a member of an organisation (like a local church) or have something in common with the credit union such as working for a charity or the public sector. If you are looking for quick loans online, this is not the loan for you. Being a non-profit, the processing of an application can take a few days or weeks and transferring funds can take a little longer than with a traditional loan.

 

Bank loans

One of the most traditional types of loan for self-employed people would come from your high street bank. You would typically go to your bank manager and ask for a credit line or money for your business. This is less common today with some many commercial lenders operating. However, if you bank with someone, they will usually try offer you loans and you can apply pretty fast through the banking app or going to a business manager at your local branch. Since they will have an insight into your payments and history, you may have more success than with other types of finance. However, banks have been known to restrict their lending criteria for sometime and you may need to wait for a good time to borrow money.

 

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