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Can Payday Loans Impact Your Ability to Get a Home Loan?

January 25, 2021

If you’re currently in the market to buy a home, you may be wondering how your past financial decisions may impact your ability to obtain approval for a home loan. This is a common question among households that are hoping to get a home loan to secure the home of their dreams, with many individuals specifically wanting to know if a payday loan can impact your ability to get a home loan.

Small personal loans and payday loans are common financial products in Australia. Understanding how they may impact your financial position and bargaining power is an important part of understanding your overall financial situation.

Can payday loans impact your ability to get a home loan?

Just like any financial product involving a line of credit or a certain credit amount that is extended to a borrower, payday loans can impact your ability to be approved for a home loan. This isn’t simply an automatic consequence of being approved for the loan though.

Rather, it is a negative impact that most often happens when the borrower is unable to repay the loan.

The simple fact that you have applied for and paid off a payday loan in your past isn’t going to automatically impact your ability to get approved for a home loan. What will cause a negative impact, however, is if you have a history of relying on payday loans or not paying them back. This can indicate to a potential lender that you might not be a good financial risk or that you have a history of not repaying your financial commitments.

Relying on payday loans too much can indicate to future lenders that you are struggling financially. If lenders
see this, they may wish to hold off on offering a loan until they see a period where you do not utilize short-term loans to ensure that you are not struggling financially.

Utilising a payday loan once or twice should not impact your ability to get approved for a loan as long as your financial history can demonstrate that you have paid off the loans successfully and that you are not struggling financially.

How do payday loans impact your credit score?

Payday loans can have a negative impact on your credit score if you are utilizing them too often. Multiple credit checks on your file within a very small frame of time will cause your credit score to dip. This is why it is a bad idea to apply for too many loans at once as it is going to cause more damage than good. However, it is imperative to keep in mind that this is accurate for any financial product.

Multiple credit card or bank loan applications on the same day or week are going to impact your credit score just as much as credit checks by smaller financial lenders.

It is also important to keep in mind the fact that successfully paying off a small payday loan can illustrate good repayment history in your credit history. As with any financial product, how you handle the responsibility is going to provide just as much, if not more information on your credit history and ability to service a financial commitment.

What to do if your home loan application has been negatively impacted

If you have utilized too many payday loans in your past, you may find that you are not currently eligible for a home loan. There are some steps you can take, however, to start improving your credit score and get a step close to being approved for a home loan. However, it’s essential to keep in mind the fact that it will take some time to rectify. We suggest taking the following steps:

● Stop applying for financial products – consistently applying for financial products can indicate to lenders that you are probably experiencing financial hardship and are seeking funds to try and rectify the situation. This is an indicator that you might not be worth the risk.

Stop applying for financial products of any kind and do your best to let your credit score settle and slowly start improving. Banks will need to see that you are not mass applying to institutions before they will be willing to consider you for a home loan.

● Pay off all of your existing debt – if you have accrued significant debt due to payday loans, you need to pay off this debt as fast as you can. Not only is this debt going to eat into your total commitment level and reduce how much you might be able to put towards home loan repayments, but individuals with a high amount of debt are going to be much more likely to begin defaulting on their payments. Unfortunately, no bank or lender will want to take this chance.

● Give it time – fixing your credit score is not an overnight activity. Credit scores can take months if not years to recover, so you may need to play the long game when it comes to a home loan. While this may not be what you want to hear, you can use the extra time you now have to work towards a better financial situation.

Continue to add to your home deposit, build up your savings account, work on your credit score and avoid applying for numerous credit products. This will all go a long way toward helping home loan providers see you as a responsible individual who is in a great financial position and who will be a great candidate for a home loan.

Talk to our team today

We understand how confusing it can be when navigating financial products or trying to figure out if applying for a payday loan will impact your ability to apply for a home loan. Breezy Loans can help you navigate the complexities of payday loans to help you understand how to make your next financial move with confidence.