‘Buy now, pay later’ services have recently seen a sharp uptick in adoption, allowing consumers to acquire goods and spread their payments over several interest-free periods. However, prospective homeowners need to be aware of the potential pitfalls associated with these services.
When assessing loan eligibility, lenders undertake a meticulous examination of your complete financial landscape. Your use of ‘buy now, pay later’ services may raise concerns that can potentially impact your application.
Here are four crucial aspects home buyers should take into account:
Employing ‘buy now, pay later’ services can inflate your overall debt-to-income ratio, possibly complicating your ability to secure a loan. This ratio is a vital metric for lenders when determining your borrowing ability, aimed at ensuring that your debt level is manageable. The addition of current debts to a prospective mortgage may limit the amount you’re able to borrow.
Credit Score Implications
‘Buy now, pay later’ services could detrimentally affect your credit score, particularly if you fail to meet payment deadlines or default. A diminished credit score can impose difficulties in securing a mortgage and may lead to higher interest rates and charges. Every lender will scrutinize your credit score and credit report to gauge your creditworthiness and your propensity to repay the loan.
Potential for Overspending
The convenience of ‘buy now, pay later’ services can spur overspending and debt accumulation, making it difficult to set aside savings for a property down payment. Lenders pay close attention to your genuine savings; lacking a certain threshold may cause hesitancy on their part to offer a loan. If you are overspending, it will also negatively affect your borrowing capacity as financial institutions assess both your steady income and expenditure.
Limited Access to Credit
An outstanding balance on ‘buy now, pay later’ services can be viewed by some lenders as a form of debt, making them less inclined to offer you funds for property purchase. This scenario can restrict your access to credit and complicate your ability to secure a mortgage or other types of financing.
While these services provide a handy way to manage cash flow and procure items otherwise out of your immediate reach, it’s crucial to be aware of the potential risks linked to their use. This is especially vital if you’re planning on a significant investment such as property in the future.
If you are thinking about buying or refinancing, even if its a few months away, talk to your broker as soon as you can. Your broker will be able to review your credit score, help with your borrowing capacity and offer advice on how to prepare before they submit your loan.