Payday loans are an expensive way to borrow money. They’re an option if you need some quick cash, but they’re recorded on your credit file and can affect what you’re able to borrow in the future.

What is a payday loan?

A payday loan is a short-term way of getting some emergency money, usually to tide you over until you get paid. You can borrow a small amount of money, and will usually pay it back with an extremely high interest rate over a short period of time.

Beware of the risks

Getting a payday loan is a decision you shouldn’t take lightly. If you borrow money because you’re short on cash, there’s a risk that you’ll get trapped in a cycle of paying off debt. As payday loans charge high interest, there’s a higher risk that they can get you stuck into further debt.

What effect does a payday loan have on your credit score?

Payday loans are recorded on your credit file. This means that any time you apply for credit, the lender will be able to see that you’ve used a payday loan in the past.

Applying for a loan will reduce your credit score for a little while. This is because the lender will perform a ‘hard search’ on your credit history, and this will be recorded on your credit file.

The overall effect of the payday loan on your credit score will depend on whether you pay it back on time and in full. Not keeping up with payments can damage your credit score.

How lenders view payday loans

As with any loan or credit, if you pay it back on time and in full, you might see a small improvement to your credit score.

However, even if you make your payments on time, some lenders will look at the fact that you’ve used a payday loan as a reason to decline your credit application. This is because it can suggest that you’re struggling with money problems.

Mortgage providers are very likely to look at payday loans negatively, and some simply won’t offer you a mortgage if you’ve used them.

How long do payday loans stay on your credit report for?

Payday loans will stay on your credit file for six years. There’s no way of removing them from your file. If you’ve used a payday loan, you’ll have to wait for six years to pass before they will come off.

Because of the long-lasting effect this can have on lenders, it’s really important to think about whether this is worth a bit of extra cash in the short term.

Do payday loans affect mortgage applications?

Having payday loans on your credit file can make getting a mortgage very difficult. When you make a mortgage application, the lender will be able to see that you’ve used payday loans in the past six years. Lenders want to be sure you can manage your money without needing to take emergency loans, so they will almost always see this as a problem.

Some mortgage providers won’t offer you a mortgage at all, while others will judge based on how often you’ve used payday loans, and how long ago your last loan was.

If you have payday loans on your credit file, you might want to speak to a mortgage adviser. They can advise you on whether you’re likely to have a mortgage application accepted, and which lenders will consider you. 

Can you get a payday loan with poor credit?

Most payday loan lenders will perform a credit check before you’re able to borrow. They might decide not to lend you money if your credit history suggests that you won’t pay it back.

Some payday loan companies advertise themselves as ‘bad credit payday loans’. They might be able to find a lender who is willing to overlook a poor credit rating.

However, these loans are likely to come with very high interest rates, and if you’re unable to keep up with repayments you may end up in a worse financial situation.

Are payday loan companies safe to use?

Be careful when using payday loan companies. Some companies that advertise as lenders are actually brokers. Brokers will pass your details onto many companies, and you might be targeted by lots of unwanted calls and letters. Some payday loan companies will ask for a fee up front. Paying this fee doesn’t guarantee you a loan, and you can often end up out-of-pocket.

What alternatives are there to payday loans?

If you’re in need of money at short notice, consider other options that may be less harmful to your finances. Our tool shows you options for borrowing money, as well as the pros and cons of each one. If you find yourself running out of cash before payday, there’s helpful advice on Where to get emergency help with money and food.