Yes, you might be able to use a payday loan for a deposit but this is probably not recommended, since payday loans are high-cost loans and should be used for emergency purposes rather than expensive home purchases.
A payday loan – in theory – can be used to pay for a deposit, although some mortgage lenders will be averse to accepting a loan as a source of payment, and you should be aware of the downsides of taking out a loan before doing so.
In fact, because such products are deemed for those who are in financial need, just using one may even impact your ability to get a mortgage.
Why Might A Payday Loan Not Be Accepted As A Deposit?
Many mortgage lenders will discard applicants who propose paying for their deposit through taking out a payday loan. This is because it will mean that in addition to having to pay off your mortgage, you will additionally bear the weight of paying off the debt amassed by taking out the loan, as well as the interest applied to both.
As such, mortgage lenders may consider you a risky borrower, and choose to reject your application.
What Is A Mortgage?
A mortgage is secured when you are lent money to purchase a property, whereby the lender takes the rights to your property if you fail to repay your loan plus interest.
Mortgages are incredibly common as buyers will need them if they cannot pay outright for their property. Given that payments are regular and expected (as you agree to them), you should have a solid means of paying your mortgage off, and should not need a payday loan to cover it.
Does The Size Of My Deposit Have An Impact?
Yes, the greater the size of your deposit, the bigger a loan you will require to cover the cost of it. In certain states, it may be difficult to attain a loan large enough to pay your deposit, therefore making it even more difficult to use a payday loan for this purpose.
Importantly, mortgage lenders tend to favour mortgage applicants who are able to put down a larger deposit. This makes them a more reliable investment for the lender. While the average down payment in the US lies at 6%, lenders have repeatedly favoured applicants able to provide a deposit of 20%.
Therefore, to be an attractive applicant while relying on a payday loan, you would need to acquire a hefty loan. Of course, this figure will depend on the value of the property you are investing in. Securing a loan to cover the value of 20% of a $1 million property will be more trying than if you are purchasing a $300,000 one.
How Much Can I Borrow?
In the US, payday loans range from $100 to $35,000. The amount you can borrow will depend on a variety of factors, such as your credit history and the state where you reside.
If you have a strong credit history consisting of prompt repayments and credibility, you represent a strong investment opportunity. If you have consistently defaulted on repayments, it casts doubt over whether you will reliably pay back your loan. Hence, the better your credit history, the higher the chance you will be able to secure a greater loan.
Additionally, different states have implemented different caps on how much one can borrow through a payday loan. For instance, while Texas has no limit, California have capped their loans at $300. Some states, such as New York, have gone as far as to ban these loans. If your state has prohibited payday loans, it will not be feasible to pay for your deposit with one.
What Should I Be Aware Of Before Borrowing?
You should familiarise yourself with the risks associated with payday loans. While these loans offer a means of immediate respite to financial demands, you run the risk of encountering future consequences if you fail to pay off your loans.
For example, failure to pay your debt on time could result in further costs, potential legal action, and damage to your credit history, which could compromise your ability to secure loans further down the line.
Most importantly, in the context of borrowing for a deposit, you should keep in mind that paying off your payday loan will not be your only commitment. You will also have to juggle your mortgage, the interest applied to it, and all other living and day-to-day costs.