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Scores, rates and repayments:Busting the myths of your credit applications

Credit is confusing. Common myths can make it hard to distinguish between what is hear-say and what is the truth. Hitachi Personal Finance has put together its top myth-busting guide to help the everyday borrowers understand credit.

  1. “I won’t need another credit check if the lender has approved me in the past”
    Every time you apply for credit, the lender has to undertake a credit search to see whether your circumstances remain the same. It will focus on any changes in your personal life that could affect your ability to repay the money you borrow, even if it hasn’t affected the way you currently repay your outstanding debt with that lender.
  2. “The more I want to borrow, the higher the interest rate will be”
    It is often the case that the interest rate will be higher when you borrow a small amount, rather than a large amount. This is because the assessment process takes the same amount of time to carry out regardless of the loan amount, but smaller loans generate less interest, meaning lenders have to charge a higher rate to compensate.
  3. “Lenders must always offer the same rate as is advertised”
    The rate advertised is a representative rate, which will be offered to the majority of customers at the same amount and term. That being said, each application is treated on its own merit, [JP1] and responsible lenders should look at your personal circumstances, outstanding debts, credit history and an assessment of affordability. After taking all of that into consideration, in some cases, the rate offered will not match the rate advertised.
  4. “My credit score is excellent, so I should be entitled to the headline rate”
    Responsible lenders must take into account all factors, and not just the bureau credit score. That means that you could have loads of credit and could be managing all repayments, however due to different lenders having their own ‘affordability’ risk scores, the rate offered could differ from the headline rate.
  5. “I will not be able to afford a loan if I am offered a higher rate”
    You would be surprised by the little difference a higher rate actually makes to your monthly repayments. Often it only adds a few pence more per month, which you may actually be able to afford. For example, borrowing £5,000 over 3 years at 4.6% rather than 4.4% will only cost 43p more per month. If that is not affordable, Hitachi Personal Finance and some other lenders may allow you to extend your loan term to get the monthly repayments back to the level you originally expected. But remember, if you do choose a longer loan term, you may pay back more in interest. [JP2]
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