In today's finance and credit landscape, lenders -- including auto loan financiers -- sell and trade loans as assets and investments. Loan sales can occur in several ways. One form of transaction is "assignment without recourse," which means that once the loan is sold or transferred, neither the borrower nor the new loan holder can hold the original loan-maker liable for anything.
A borrower with a "without recourse" assignment clause in her auto loan contract is consenting to allow the lender to sell or transfer the loan to another financing company. Moreover, once the transfer occurs, the borrower cannot hold the initial lender responsible for any errors, mistakes, misrepresentations or promises. The new party owns the loan and the borrower's relationship with the original lender terminates completely -- without recourse.
Lenders also have "assignment without recourse" clauses in their sales contracts. When an initial lender sells an auto loan to another finance company, it may include a "without recourse" clause to ensure it will never again have to deal with issues related to the loan. That means a finance company purchasing an auto loan must check loan terms and situations carefully because in essence, the initial lender has a "no returns" policy. If the loan was made to a poor candidate or presents collection problems, the problem falls irrevocably to the purchaser.
A transfer or reassignment of a loan means a borrower must deal with a new lender that may have different policies and approaches to the loan. Although the new finance company cannot change the loan terms, it can and probably will require the borrower to remit payment to a different address or use a new online or electronic payment system. Customer service contacts also change and in some cases, so do policies about late and early payments. Borrowers should read carefully through materials and literature sent to them when their auto loan changes assignment and call the new lender with any questions or concerns as soon as the transfer occurs.
Auto-loan recipients should read their loan contracts carefully before signing. Something as seemingly small and innocuous as an "assignment without recourse" clause can have profound effects. Consumers who want to select a lender and ensure they maintain a relationship with only that lender throughout the course of their loans should decline anything with an assignment clause. Those who don't mind the assignment of a loan, but want to ensure the original lender is responsible for any mistakes or misrepresentations should insist on an "assignment with recourse" clause.
- Polka Dot Images/Polka Dot/Getty Images