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Cracking down on expensive and predatory lending is a must. This is made harder for the poorer paying a poverty premium on utilities and other essentials, never mind not being able to get cheaper credit that is available to better off people. The Institute for Fiscal Studies has pointed out that debt problems tend to me more persistent among the poorest people, with 40% of the poorest fifth of households who were in arrears or spending more than a third of their income servicing their debts between 2010 and 2012 still doing so several years later.
Regulation has improved, albeit slowly the overall cost of payday loans means high cost credit remains a serious issue. It is not uncommon in the US for someone caught in the debt cycle to be rolling over what are supposed to be short-term payday loans for months at a time, forking out around a third of their pay on monthly repayments, and paying far more in costs and fees than the original loan amount.
The worrying combination of problem debt and the government's past austerity policies means it's no surprise that child poverty is at its highest since 2010 and 30% of Britain's children are now classified as poor (two-thirds of whom are from working families). The FCA found that 4.1 million people in the UK are in serious financial difficulty.
The payday loan debt cycle comes about when you take one of them out, can't afford to pay it back, and then are offered a renewal on the loan for an additional fee. That cycle tends to extend itself for months or even years.
Currently, this is legal, although legislation has been introduced to place more oversight and regulations on companies issuing payday loans specifically, requiring lenders to verify that the borrower has the ability to pay the loan back.
The act of applying for credit can have an adverse impact. That's because any responsible lender should run a "hard" search on your credit history before offering you a loan, and it's normal for this search to have a slight negative impact on your credit score. For most of us that's unavoidable, but provided you then go on to pay off the loan on schedule, that negative impact will be minimal and short-lived. Lenders will be able to see how much you applied for, when and from what source.
Making multiple payday loan applications in a short space of time will almost certainly have a significant negative effect on your credit score, and is a strong indicator of irresponsible borrowing or severe financial difficulties. That means it could seriously harm your chances of being approved for another loan in the future.
Prospective lenders will also want to see how much debt you already have, and how much credit you have access to. If you currently owe money to payday lenders, this is likely to reduce the amount that a lender would be willing to offer you.
Missing a repayment on these loans is an even stronger indicator of irresponsible borrowing. It'll be reported back to credit reference agencies and have a significant, lasting negative impact on your credit score.
Unfortunately, it is also possible that seeing a payday loan in your credit history, even if it was paid back in full and on schedule, could simply put off some lenders. Regular use of payday loans is more likely to be a red flag.
Payday loans can have a negative impact on the chances of securing a mortgage. Mortgage lenders like Kingston Mortgages straightaway reject applicants who have taken a payday loan in the past one-year. Similarly, GE Money is unlikely to provide mortgages to applicants who have taken payday loans in the past three months, or more than twice in the last one year.
Many people are concerned with the on going debate of whether simply having a payday loan on your credit record can impact your chances of being approved for a mortgage.
In reality mortgage lenders and brokers should treat a payday loan as if it were any other loan, whether it is car finance, personal loan or guarantor loan.