Understanding credit can be tricky. That’s why, today, we’re busting some of the common myths around credit applications to give you an insight into how finance companies work and, more importantly, why they do what they do.
I’ve been approved by them before, so I don’t see why I’d have trouble now.
Each time you apply for credit, the lender has to undertake another credit search to see if anything in your circumstances has changed, even if it hasn’t affected the way you repay your outstanding debt with that particular lender. This will take into account any changes in your personal circumstances which could have an impact on your ability to repay and affordability.
I’m only borrowing a small amount, so why is the Interest rate higher than if I borrow a larger sum?
Lenders are required to make a full assessment of your ability to repay a loan regardless of how much you want to borrow. Smaller loans cost as much to process as larger sums but generate less interest, which is why lenders have to charge a slightly higher rate to compensate for this.
It’s illegal to advertise one rate then quote another on application.
The headline rate advertised is a representative rate that the majority of customers, who are accepted for a loan at the same amount and term, will be offered. However, in line with the Financial Conduct Authority (FCA) each application is treated on its own merit, as all responsible lenders should take into account your current personal circumstances, including any outstanding debts, your credit history and an assessment of affordability. This explains why, in some cases, the rate you get might not always be the one advertised.
I have an excellent credit rating so I should be entitled to the headline rate.
As mentioned above, all responsible lenders will look at a number of factors not just your bureau credit score. Even if you have bags of credit and you’re managing all repayments, different lenders will have their own ‘affordability’ risk scores which come into play.
What can I do if I’m not accepted or offered a higher rate?
- Work to improve your credit rating
Improving your credit rating is easy when you know how, though it may take a bit of time. Follow these tips on ensuring your rating is on the up.
- Extend your loan term
If you get offered a higher APR than expected, don’t panic, take a look at the actual difference it makes to your monthly repayments overall, it may only be a few pence a month difference. For example, borrowing £5,000 over 3 years at 4.6% rather than the headline 4.4% will only cost 43p more per month, which may still be affordable for you. If not, with our tailored approach, you could also look at increasing your loan term to get the monthly payments back to the level you originally expected. Again you’d be surprised the difference this could make.
- Save money elsewhere
At Hitachi, we’re dedicated to providing the hottest hints and tips on money saving – take a look at our latest posts.
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