The use of pay-day loans across the UK has risen considerably over the past 12 months, with the temptation of quickly accessible funds an option that many people have been unable to ignore. But new figures from a debt advice charity, Stepchange, show that more and more users of pay-day funding are admitting that they have dug a hole they are now unable to climb out of.
While this news alone is troubling, many contractors may not be aware that the use of this quick to access funding can cause harm to a mortgage application. As the Financial Conduct Authority seek to clamp down on perceived weak underwriting processes this year, part of its Mortgage Market Review will involve intensive checks on what a lender considers acceptable activity for a potential borrower. In reaction to this, banks have begun tightening criteria during their application process, and the use of pay-day finance is known to affect the outcome of a decision for many banks.
Positive stories of an improved market and economy are rife at present, and the housing sector is seeing almost daily improvements to business levels. However, many contractors are not seeing increases to their daily or hourly rate, as the average income is not rising and matching inflation at the same level as the cost of living. Stepchange have reported that in 2013, 66,557 contacted the charity for assistance with managing their finances. This figure was up 82 per cent from 2012, and it suggests that many people are struggling to balance the books.
For Stepchange, Mike O’Connor commented: “The widespread harm and misery caused by payday loans continue unabated. The industry has failed to address the problems causing untold misery and damage to financially vulnerable consumers across the UK.”
The hope is that changes to be introduced by the chancellor George Osborne to the way in which companies cap interest charges, and the process used to evaluate a customer’s application for funding, will bring about wholesale reductions in the usage of the method of finance. Alongside MMR, the expectation from the Government and the FCA is that these steps will curb the reliance on the pay-day sector.
However, O’Connor went on to say: “We hope the FCA's proposals will address some of the areas of consumer detriment, but on issues such as affordability checking, rollover and repeat borrowing, there is an urgent need for even more radical reform.”
Mark McBurney, a senior mortgage consultant at Contractor Mortgages Made Easy, said: “The ever changing landscape of underwriting will make mortgage funding tougher over the next couple of years, as lenders will need to test the boundaries that the FCA are going to install for stress-testing a mortgage application. It is important that any contractor looking for a stop gap to the payment of their next invoice should not seek short term loan options to compensate.”
McBurney elaborated on the issue, saying: “From the view of an underwriter, borrowing to bridge a short term gap suggests that an individual is struggling to meet their day to day expenses. On that basis, the decision to agree lending even more debt to that individual becomes questionable. To avoid any disappointment, it would be best to not take the risk at all.”
Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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