Payday lenders will have to urge borrowers to seek debt advice on future adverts, the Government says, as new evidence finds mortgage lenders reluctant to consider applications from those who have taken out a short-term loan.
Under new proposals, lenders will have to warn prospective borrowers about potential negative consequences for their credit scores, said Business Secretary Vince Cable.
The proposals come amid concerns that consumers are not always fully aware of the ramifications for their credit file if they apply for a payday loan.
Like other forms of credit, payday loans remain on a borrower’s credit history for six years. But even if a borrower repays the cash without any trouble, mortgage lenders are still more likely to reject an applicant outright if they see evidence of payday loan activity.
Mortgage lenders are discouraged by payday loan activity on a credit file as it appears to imply that a borrower has run close to their financial limit or that they lack the ability to manage their finances effectively.
Recent figures amassed by Monetary Strategy show that mortgage applications were more likely to be dismissed out of hand if the applicant had a payday loan on their credit file.
The industry magazine found that of 279 brokers, two thirds (184) reported that their clients had been negatively affected in this way.
It is hoped that more direct warnings on adverts will help to keep consumers more aware about the consequences of their lending decisions and how they may be interpreted by mortgage lenders in the future.
The Consumer Finance Association, which represents a number of prominent payday lenders, said it would consult with credit reference agencies about whether it was a lender’s duty to warn consumers about the consequences of applying for a loan.
The news follows the recent announcement that the cost of payday loans is to be capped.
Under new legislation, which will be added to the Banking Reform Bill, the cost of loans – including arrangement fees and charges – will be capped at a rate to be determined by the Financial Conduct Authority when it assumes control of the industry in April 2014.
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