What Happens to Your Car Loan if the Lending Bank Fails

If you received your car loan from a bank, you have a legitimate reason to wonder what would occur if that bank fails. Many borrowers wonder if they would have to repay the debt immediately, get to walk away without repaying or even lose the car all together. None of these scenarios is the case. In fact, if the bank that lent you the money fails, you will not likely notice the difference on your end.

Loans are Assets

The first point to understand is your loan is an asset to the bank. Even thought the money is currently in your hands, the fact you owe the funds in return means the loan counts in the positive asset column of the bank's financial statements. The only exception is a loan in default, which then becomes a loss. If your loan is still in good standing, it will be handled during the process of liquidating all the bank’s assets.

When the FDIC steps in to sell off the bank's assets in the liquidation proceedings, you loan will be one of the assets up for sale. Another bank may purchase the entirety of the financial holdings from your bank. Or, a private investor may purchase specific loans only. In either case, your loan will pass to a new owner. 

New Owners Contacts You

The new owner will have the opportunity to review your loan and its terms before purchasing the contract. The lender will not be permitted to change the contract upon purchasing the loan. This means the purchaser simply takes your previous lender's spot on the existing loan contract. You will be contacted by this new lender to be informed of the change. The lender will give you instructions for how to continue making your loan payments in the future.

Grace Period on Payments

Since there may be a delay in the time it takes for a new lender to buy your mortgage, you will have a grace period where you are not responsible for making any car loan payments. Typically, this period is 60 days. After that point, you will begin making payments again at the given installment amount. You will not be excused for the payments that came due during the grace period. Instead, you will have to make them at the same time you make your current payments. As such, you should be setting the money aside to make the payments immediately upon hearing from your new lender.

New Payments Begin

Once you know when and where to make the payments, you simply resume paying your loan to the new lending institution just as you used to pay your loan to the old lender. You may receive the opportunity to modify your loan with the new lender if the lender does not think the loan contract is a good deal. The lender may allow you to prepay your entire loan with no penalty, for example. Be wary of any offer to modify the loan to make sure any renegotiation is not entirely in the lender's favor. 

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