The high interest cost of payday loans isn't the only way they can affect your financial future. BBC Newsnight has discovered strong evidence to show that having a payday loan won't do you any good when you're trying to apply for a mortgage.
Most lenders don't say publically they'll turn down borrowers with payday loans, but the brokers who arrange half the country's mortgages are finding that with most lenders, that's exactly what happens. In an interview with BBC Newsnight, Jonathan Clark a broker from Chadney Bulgin Financial Planners, recently advised a young couple wanting a Help to Buy mortgage who had taken out multiple payday loans with Wonga.
Jonathan Clark commented,: "I knew it was going to be a problem, but I was a bit shocked at the response I got because although one or two said they could be acceptable subject to credit score, which is a polite way of saying it probably won't work, most of them were very negative and said it would be an instant decline. And that was regardless of their income, the conduct of their accounts and anything else. These were major high street lenders."
Three weeks ago, Newsnight asked the chief operating officer of Wonga, Niall Wass, if he'd warn prospective customers on his website that payday loans could damage their chances of getting a mortgage. He said they would certainly have a look at the possibility of doing that and come back to them.
To find more evidence, Newsnight asked the trade publication Mortgage Strategy to ask its readers, the brokers, what the lenders have been telling them. 289 of them came back and of those, 184 - nearly two thirds - had had clients with payday loans turned down for a mortgage in the past year.
When you take out a payday loan, it stays on your record for six years so it can affect your mortgage application for that length of time. You would have thought customers who take out payday loans would want to know that before they take them out. Now payday lenders pride themselves on their transparency, but do they say anything on their websites about that vitally important fact? I can't find anything.
Responding to the evidence, Richard Griffiths from the Consumer Finance Association which is t the trade body that speaks for most payday lenders said : "We certainly need to look at this more closely and we've asked the Council of Mortgage Lenders and also the main credit reference agencies if they can give us any insight so that will help us to understand the issue and then we can work together as an industry to address it more widely."
Jonathan Clark, Chadney Bulgin Financial Planners remarked: "I think people would be very shocked if they knew that getting a payday loan now and paying it off immediately the next month afterwards could impact on their ability to get a mortgage 3, 4 or 5 years in the future. I just don't think people are aware of that and they should be."
It's clear to mortgage brokers that most mortgage lenders see payday loans as a sign that financially, you're not coping. That's known to the lenders, but not to thousands of young people who may still think that a payday loan won't harm their chances of buying their own home.
Newnight presenter Jeremy Paxman, asked Business Secretary Vince Cable whether he thought “it's fair that people endanger their chances of getting a mortgage simply because they've taken out a payday loan whether they've had any difficulty repaying it or not?"
Vince Cable MP, Business Secretary responded: "Well it isn't fair on the basis of the evidence you've just put forward. Now that the industry is being properly regulated that should stop and one of the key steps in the regulation is regulating advertising so the advertising will require a company offering payday loans to make it clear that borrowers have to seek debt advice and if they seek debt advice, they will know the risk of imperilling their credit status."