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 information 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.
