What Happens to Your Personal Loan if the Lending Bank Fails

Your personal loan will not simply disappear if the lending bank fails, much to the disappointment of many borrowers. A bank failure is handled much like any other business bankruptcy. The assets of the bank are sold off to cover the cost of existing debts. One of the assets of the bank is actually existing loans in good standing. As such, your loan will be sold to another lender.

Loans as Assets

It may be hard to think of your loan as an asset because technically the bank has lost money to date by giving you the funds. If you default on the loan, then it does in fact become a negative loss on the bank's balance sheet. Loans in good standing count in the positive, though, because they will generate future returns. All forms of loans are assets for a bank including mortgages, auto loans and even credit card debt. Your personal loan is no different. Since it will generate money for the bank in the future, it is an asset with a net value.

Selling of Loans

When a bank fails, buyers will consider the value of any potential asset the bank was holding. For banks insured by the FDIC, which most banks today are, the FDIC itself will step in to manage the selling of assets to help the bank deal with resolving its debt. The FDIC does not sell the loans and asset to just anyone. The goal is to have a new lender take over the loans that has the ability to manage them in a productive manner. Typically, this is another bank. For example, when Washington Mutual failed, JPMorgan Chase bought all of the assets of the bank. At times, individual investors may buy your loan. This usually occurs before a bank defaults, though, when it is trying to sell off bad debts.

Dealing with the New Lender

Once your loan is sold to a new lender, the lender will contact you to give you instructions to start paying the loan again. In the meantime, there is a grace period where you do not have to make loan payments. The payments will still come due, however, so you can expect to pay them immediately once the new lender is in place. The new lender bought your personal loan exactly as it was written. As such, nothing about your loan will change except where you make your payments each month.

Resolving the Debt

Your new lender may give you the chance to modify or resolve your debt. You should be wary of the lender pursuing a modification. Most lenders will offer modifications when they can create good loans for themselves. However, the lender likely purchased your loan at a bargain. This means they will profit even if they recover a lot less than the loan was actually written for from you. You may have the chance to pay off the loan at 50-75% of its initial value. In this case, you can benefit from the sale of your loan if you have the cash to pay it off at once.

Need Cash Now? Get a Cash Advance