Whether or not you have difficulties repaying the cash, taking out a payday loan will negatively affect your credit, and in a big way. Moreover, the loan will remain on your credit record for nearly six years. Payday lenders up until now have not informed their clients of this fact.
Trade publication Mortgage Strategy said almost two-thirds of the brokers they contacted had a client turned down for a mortgage after taking out a payday loan. Under future advertising regulation changes, borrowers will receive warnings about the negative effect of a payday loan, said Business Secretary Vince Cable.
Credit scores are instantly adversely affected after people take out payday loans and many mortgage applications have been instantly declined, according to evidence gathered by Mortgage Strategy. A very high percentage of borrowers have ruined their credit in this way; 184 brokers out of 279 said they had clients in such a position.
The Consumer Finance Association, a trade body that represents payday lenders, said it would look at whether customers should be warned about the consequences and has asked major credit reference agencies as well as the Council of Mortgage Lenders for more information.
The severity of the consequences came as a surprise to the government, which is introducing a new law to cap the cost of payday loans. Although the lenders say the loans are meant to be short-term, they have been criticized for charging more than 5,000% annual interest rate.
Payday lenders say the annual rate makes charges appear worse than they really are. The Financial Conduct Authority (FCA), the new industry regulator, will decide on the level of the cap, which has not been determined yet.The Banking Reform Bill that is presently going through Parliament will include the amount of the cap.
Business Secretary Vince Cable said future payday lending advertising would carry a warning label that borrowers would have to seek debt advice before obtaining the loan. "If they seek debt advice they will know the risk of imperilling their credit status," said Cable.
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