A short-term loan can seem appealing due to the low amounts required and the short amount of time they need to be paid back in. However, what also needs to be considered when applying for a short-term loan is the impact it could have on your mortgage application. Below we go into more detail about how and why this is an important factor to remember.
How does short-term borrowing affect your mortgage application?
According to recent research, over 40% of millennials are currently turning to payday loans to finance their lifestyle. While this generation are eager to gain a foothold in a property market with sky-high prices, their spending habits could affect their future.
This is because every time you apply for credit, it creates a ‘footprint’ on your credit history. This can be checked by other lenders when it comes to reviewing an application for credit.
The good news is that taking out a payday loan or short-term loan does not necessarily mean it will have a negative impact on your credit history.
Paying off a short-term loan in full, and within the agreed repayment period, will been seen as a positive by future lenders when they are looking at your credit history.
The reason the loan was taken out, how frequently you requested credit and how it was managed, will all be taken into account by the lender when it comes to applying for a mortgage. But remember, if they believe the loans were unnecessary, it could have a negative effect on the application.
When applying for a mortgage, the lender will use an affordability assessment to review your income, outgoings and overall ability to pay back the loan.
They will also have full sight of your credit history, including any payday loans or short-term loans you have previously requested. If they see you have frequently sought out short-term loans, they may take the view you are unable to manage your finances. It would then place doubt in their minds about how reliable you may be to pay back the loan without defaulting.
Every mortgage lender will review an application based on the analysis of your credit history and financial well-being. If you are refused a mortgage due to having too many short-term or payday loans, this is simply to protect themselves from lending money to someone who may potentially be unable to repay it.
Should I avoid taking out short-term loans?
While the general rule is that lenders review your credit history and current financial status, each one has their own criteria. This makes it difficult to know exactly what each one is looking for.
The safest option is to avoid taking out a short-term loan if it is not an absolute necessity. Otherwise, there is always the chance it could negatively affect your mortgage application. If you do have to apply for short-term credit, then as long as you manage it well and repay the loan on-time, then there is every chance you won’t have anything to worry about.
This is a collaborative post.