Do payday loans hurt my ability to get a mortgage?
Payday loans and cash advances are short-term, low-balance, high-APR loans that are usually granted at usury rates. They are named for a tendency for funds to be borrowed against a post-dated check cashed on the borrower's upcoming payday. Payday loans do not usually show up on a credit report, which limits mortgage lenders' ability to find out about them. However, payday loans can make it more difficult to get a mortgage.
Where payday loans typically hurt is when default occurs. The demographic groups that take out payday loans tend to have higher default rates. If a payday loan default shows up on your credit report, it is likely to hurt your chances of being approved for a mortgage.
More research on this subject has been conducted in the United Kingdom than in the United States. The Financial Conduct Authority has increasingly regulated payday loans. Mortgage industry polls have suggested that up to 45% of brokers in the U.K. have had a client application rejected because of a prior payday loan.
Even though standard credit reports may not show payday loans, the credit reporting agency Experian began collecting and making payday loan information about consumers available as early as 2012. Equifax followed suit a year later.
It is difficult to know whether or not a payday loan can hurt you during a mortgage application. It is likely to depend on the financial institution. However, there are many other factors that lenders consider on an application, which limits payday loans' impact.