What happens when you apply for a loan?

Last week your mechanic advised you not to spend any more money on the faithful old car
that has carried you over many miles of highway. The time has come to shop around for a new
one. But cars were a lot cheaper when you last bought one. This time you’ll have to take out
a big loan.

You don’t necessarily have to borrow from the bank where you have an account. You should
shop around for a lender that offers the best deal, including the lowest interest rate. Sometimes
car companies offer low-interest, or even no-interest loans. And don’t forget the internet. You
can research a wealth of online resources from the comfort of your home or office.

Your first step is to figure out how much you can afford to borrow. You will not know if you
can afford the new car—or if a lender will let you borrow the amount want—until after you
complete a loan application. In addition to routine personal information such as your name,
address, telephone number, and Social Security number, a loan application also asks for
infor-mation on how much money you earn, how long you have worked at your current job, and
how much money you already owe on credit card bills and other debts.

The next step is for the lender to evaluate your application and decide if you are a “good risk.”
Before they lend you money, lenders want to be as certain as possible that you will be able
to pay them back. Do you earn enough money to keep up with your loan payments? Do you
have a history of paying your debts on time? To answer these questions, lenders rely heavily
on credit bureaus and credit reports.

There are approximately 1200 local and regional credit bureaus in the United States. All are private companies (not government agencies), and most
are linked by computer to three nationwide credit bureaus. They provide much of the
information that lenders need to evaluate loan applications.

When you apply for a loan, your bank contacts a credit bureau and asks for a copy of your
credit report, which is basically a summary of your payment habits—information about loans,
charge accounts, credit card accounts, bankruptcies, and court judgments that might require
a potential borrower to pay a large sum of money as a settlement. How the information gets
into your credit report is no mystery. When you apply for a new charge account or credit card,
clerks transfer information from your application to electronic records that are forwarded to
one or more of the nationwide credit bureaus. If you are late in paying your bills, or if you miss
a payment, the information goes into your credit report. Lenders then evaluate your report and
try to decide if you are a “good risk.”

After weighing all the information, your bank will either approve or deny your loan request.
If your request is denied, the bank must notify you in writing within 30 days, and the letter
must state the reason for denying your loan. If your loan is approved, the bank will give you a
check made out to your auto dealer or transfer the funds to your account. To protect itself in
case you fail to repay the loan, your bank will hold the legal title (ownership papers) to your
purchase until you pay off the loan.

Before applying for a loan, you should request a copy of your credit report. If there are any
issues or questions, you may be able to address them before processing a loan application.

You are entitled to a free copy of your credit report, at your request, once every 12 months. For
more information on how to request a copy, visit the Federal Trade Commission website at
http://www.ftc.gov

Before applying for a loan, you should request a copy of your credit report.

Source from : http://www.bos.frb.org