Car Loan Cancellation: What To Do If It Happens

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January 27, 2012

It is not common for a loan cancellation by a bank to occur. In most cases, if a bank is taken over by another bank or goes into insolvency, it sells any loans it is holding to a finance company which may then renegotiate the loan.

Purchase Loans

In most cases, car dealerships are in the business of selling cars, not financing car loans. This means that once you have purchased the car, they usually will sell the loan to a finance company who then maintains the loan. This includes collecting payments and making any special arrangements should the borrower miss a payment or be late in a monthly payment. In most states, there are legal requirements that a car dealership must meet when they sell a car and intend to then turn around and sell the purchase loan. These requirements usually require a notice of intent to sell the loan. If they fail to provide this notification, then the borrower should have the reasonable expectation that the dealership will maintain the loan themselves. Once this notice is provided - usually within a matter of a week or so of the purchase - the borrower usually has the option of returning the car and regaining any down payment and trade in costs that were included in the financial transaction.

Car Repossession

Should the borrower default on their auto loan, then the lender will most likely attempt to repossess the car. Just because the lender repossesses the car does not mean that the auto loan has been cancelled. In fact, the borrower will still be expected to pay the loan and collection attempts will not only include the balance of the auto loan, but also added costs for repossessing the car, and any costs incurred to sell it. While some lenders will be able to sell a repossessed car, the original borrower will be expected to pay for any fees, the difference between the loan balance, and the price of the car when it was sold.

In many cases, repossessions continue to haunt borrowers for years because lenders will continue to report a charge off for an auto loan default multiple times while they attempt to collect on the debt, and sell it repeatedly to collection agencies. As a result, this kind of debt often appears for many years beyond the original seven years that a debt may appear on a credit report.

If a Cancellation Occurs

Should you find yourself in the extremely rare position of having a bank cancel your auto loan, immediately contact the bank upon receiving notification of the cancellation. In most cases, there is an instigating event that should be immediately resolved if at all possible. Technically, if you are late by one day on a car payment, you are in default of your loan and it may be that this has occurred. If you cannot find an immediate solution with a telephone call, ask for the name of a manager or decision maker and continue to attempt to resolve the problem. Document all of your efforts and send a letter to the finance company detailing your attempts.

Bank cancellations of car loans are extremely rare and often the result of an error or problem with a payment. Make every effort to resolve the problem by immediately contacting the bank. If you find yourself in the position of your car being repossessed, do not assume that relieves you of the financial obligation of the loan debt.

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