Cost of living and payday loans

Journalist: Anna Sagar, Mortgage Solutions / Specialist Lending Solutions

ended 12. May 2022

Looking to speak to mortgage brokers, about cost of living crisis and payday loans/debts. 

  1. Do you think potential borrowers may take out payday loans or unsecured debt as the cost of living worsens?
  2. Could this negatively impact their ability to get a mortgage later down the line and why?
  3. Will existing mortgage borrowers be tempted to take out these kind of loans and unsecured debt? 
  4. What would your advice be to customers who are considering or have taken out these kinds of loans and debts?

9 responses from the Newspage community

Star Quote
"Payday loans are the debt equivalent of eating a dodgy kebab. It might taste good at the time but you'll regret it later when the effects set in. Borrowing using payday loans show you have no other more suitable option and are desperate for funds to cover what could well be a quite legitimate shortfall. When things settle and you want that high street mortgage, the payday loan will show as a big red flag on your credit report for years, jeopardising your ability to get a good deal. If customers have already taken them, of course a good mortgage adviser can help. But it's likely the customer will be seen as higher risk by a lender and pay more for their mortgage accordingly."
Star Quote
"Given that the reputation of payday loans lies in the gutter along with 70s TV stars, MPs who google 'Tractors' in the House of Commons and Russian state media, I'd like to think that people will avoid them like the plague they are. Sadly, many will taken them out and feel the consequences for years. Even when clients have historic payday loans, it's so much harder to get them a mortgage, meaning they miss out on the best rates and end up paying for it years after they have actually cleared the loans."
Star Quote
"Worryingly, I believe that, as the cost of living worsens, the number of people looking to take out unsecured debt or even second charges on their properties will increase, which will inevitably cause major issues should property prices start to fall, as many are anticipating. For us, the question is not if house prices fall, but when. Borrowing at the moment is dependent on many things, namely a good credit file, steady income and loan-to-value, however this potential extra debt people may get into will undoubtedly cause issues should they need to remortgage. There will still be those tier 2 and 3 lenders that will have an appetite to lend in situations like this but that does, unfortunately, come at a cost that many will not be able to afford. Existing mortgage borrowers may be tempted to take out unsecured debt to try and sail through this cost of living crisis so many people are currently facing. If you find yourself in a situation where you feel that taking on additional debt is the only way forward, seek advice from an independent broker about whether there could perhaps be more suitable options, such as releasing equity from your home via a remortgage or a secured loan. But it's important you understand the ramifications of this and how it could impact you in the future should the crisis worsen, or continue."
"High street lenders like to see customers who are credit-savvy, not credit-hungry, and a track record of payday loans would indicate to them that a customer was already struggling to manage their finances. This is absolutely not what they want to see from someone requesting a great big lump sum of money from them. My advice to anyone trying to get a mortgage? Avoid payday loans like the plague. And if you feel like you have no other options, all you're doing is kicking the can down the road, having to pay more money out in the long run. Engage services like Citizens Advice or Step Change who may actually be able to help rather than pile a load more bad debt on top."
"If you are considering borrowing money to pay essential household bills then STOP! This is not going to help you in the long run and will likely create issues for you in the not-too-distant future. Mortgage lenders hate seeing payday loans on someone's credit file, so you really could be shooting yourself in the foot. Borrowing more money when you are already struggling is very rarely the right move. If you are really struggling, it would be best to ask for help from your existing lender; be that a car loan, credit card, personal loan, mortgage, or anything else. Ultimately, it is in their best interest to help you pay the money back to them, so they have teams set up to help. That could mean something as simple as them agreeing to a longer term to reduce your payments, or a temporary period of time on interest only. It could mean something a bit more assertive with them only agreeing to help once they have assessed your income and expenditure, then asking you to cancel some other things before they agree to changing the terms of the loan; expect to have to csncel TV and entertainment packages first, for example."
"Payday loans are kryptonite for anyone with a mortgage who wants to remortgage or a buyer looking to purchase for the first time or move home. Payday loans are a clear sign of financial distress and prove to lenders that you cannot live within your means. Therefore, they should be avoided at all costs."
"The reputation of payday loans is pretty much similar to loan sharks, those who occupy a cesspool of finance and prey on the vulnerable. How they get away with advertising their products as they do is beyond me, and for anyone looking to get a mortgage or remortgage in the hear term, they are detrimental as they show a lender the client is unable to manage on their income so are not a safe bet for lending. With interest rates rising, more and more people will look towards possible personal loans for small home improvements for kitchens or bathrooms as these types of loans are taken over a shorter period of time compared to a mortgage so you in essence pay less interest on the money borrowed. Anyone considering taking any form of loans or finance should always consider the pros and the cons as every action has a consequence."
"Debt levels are rising faster than Boris can say "it wasn't a party". It seems inevitable that increasing numbers of people will resort to payday loans or unsecured loans, particularly once the next fuel price hike hits in October. Payday loans are a no-no for most mortgage lenders, and leave a big black mark on your credit report. So best avoided if at all possible."
"Following the cost-of-living crisis, I predict that unfortunately many UK borrowers and homeowners will struggle to meet their repayments. It may well be that we see more missed payments, and defaults on credit agreements, with consumers borrowing more to keep up with their rising costs of living. My advice to those considering taking out payday loans to support their bills and outgoings is think very carefully about this. This can be detrimental to any future borrowing. Contact your household bills provider to see if anything can be done, look at the rest of your outgoings, can non-essential spending be reduced? Your mortgage is usually your biggest commitment, so speak to your broker to review your mortgage to see if this can become more affordable to ease the pressure of your total monthly commitments and ensure you do not get into debt. For those that do find themselves in this situation, specialist advice from a qualified whole of market mortgage broker will be vital in these situations to ensure that they can access the most suitable mortgage options. I am passionate about ensuring those with ‘real life situations’ can still obtain the most suitable mortgage deal for them and I am concerned there will be lots of first-time buyers or existing homeowners in this situation in the future."