If you have ever taken out a payday loan - even if you paid it back on time and in full - it could harm your chance of getting a mortgage. One lender is rejecting applicants who have turned to these loans more than once in the previous year.

So why is it doing this, and is the practice likely to spread?

Rejected

Payday loans may seem like a handy solution when you are living a bit closer to the edge than before, and when an unexpected expense leaves you over-stretched before pay day. We all know we will pay dearly for failing to leave ourselves any wiggle room, with interests rates reaching into the stratosphere. But now it emerges that it could harm your chances of getting a mortgage too.

GE Money Home Lending, which offers mortgages through brokers, has announced that anyone who has taken a payday loan in the last three months - or more than one in the previous year - will have their mortgage application rejected - even if they paid it all back in time.


It said in a statement: ""As a responsible lender in a challenging market we review a range of data to make prudent mortgage lending decisions. Payday loan data is one of many items included in this review and if a mortgage applicant has a current or had a recent payday loan, it is unlikely that we will consider their mortgage application."

Spread?

Ray Boulger, senior technical manager at Charcol mortgage brokers says this isn't common practice within the industry. However, he adds that it's a logical step, saying: "The need for a payday loan is a clear sign of financial distress, so it makes sense for a lender to take it into consideration."

So far, he says, GE Money is alone in taking this particular approach. However, he points out: "In this market, once one lender has introduced new criteria for lending, other lenders will want to consider whether it is appropriate for them. It will cause other lenders to think."

Sarah Brooks, Director of Financial Services at Consumer Focus says it's another reason why people should be careful about taking on a payday loan. She explains: "We have long held concerns about this market. Payday loans can be convenient for some consumers but they are a very expensive way to borrow money. If people don't pay back the loan on time the amount they owe increases rapidly - consumers should look very carefully at their options before taking out a payday loan."

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Impact

With 1.2 million people taking out a payday loan last year, this could concern a large number of potential borrowers. However, Boulger highlights that the number of people this is likely to affect will be relatively small, as at the moment lenders are requiring 5% or 10% deposits, and if you had these savings, then it begs the question of why you would need a payday loan.

He adds: "In many cases, those taking out payday loans have some form of adverse credit anyway, which would disqualify them for a mortgage in many cases, so the issue of the payday loan would be a lesser concern."

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