What happens when a loan company goes out of business

It used to be that your local bank or credit union was the only place to get a loan. But with the rise of online lenders, it’s easy to get financing without leaving your home.

However, online lending can have its cons: these lenders may not stick around as long. Some online lenders go out of business due to poor business plans, while others may get shut down for legal reasons. Many are startups and simply can’t make it through those tough first few years.

We take a look at what happens when a lender goes out of business and the steps you should take.

If my lender shuts down, do I still have to repay the loan?

Yes. When you borrow money, you sign a legal contract containing specific terms and conditions related to your repayments, rates and loan term. The legal status of your contract doesn’t change when your lender shuts down.

In fact, you might not notice much of a difference in your repayment experience after a lender goes out of business. That’s because your debt is typically up for sale or handed off to a liquidation firm when a lender closes. Another company simply buys or acquires your loan and starts receiving your repayments. You’re still on the hook to make your loan repayments — with the same APR and repayment terms.

What happens if I stop making repayments?

Your new lender will inevitably notice and this can seriously damage your credit score. Depending on why your original lender shut down, it’s possible that your new lender will be even better at keeping track of your repayments.

Payments that are more than 30 days late can show up as delinquencies on your credit report, sometimes resulting in a drop of around 100 points in your score. Any defaults could follow you around for years to come, making it difficult to qualify for future loans, credit cards, mortgages and other forms of credit.

Here’s what typically happens to your loan when a lender shuts down

Firstly, the lender will stop funding new loans. This typically won’t affect you unless you have a line of credit you’d like to tap into or want to apply for a new loan.

After funding stops, one of three things happen:

• Your lender continues to collect repayments until every loan is paid off.
• A service or another lender buys your lender’s portfolio.
• A liquidation firm takes on your lender’s portfolio.

At this point, you should receive notification from your lender or the new company you’ll be paying to. More than likely, your loan terms and conditions remain the same — unless your lender charged rates that are higher than your province or territories legal limits, in which case your rates may decrease.

If a court agrees that you were a victim of predatory lending by taking on the loan, you could receive a refund of any interest or fees you paid under the illegal conditions.

Borrower checklist

Here’s a few ways to keep on top of what you owe when a new company buys your loan:

• Contact your old and new lenders. Reaching out to both your new and old lenders can help you better understand what to expect and how to prepare yourself for any changes.
• Set up an online account. If your loan is sold to a new company, set up a new online account with that lender to easily access information about your account and make your repayments easily.
• Confirm your repayment terms. Review your loan’s repayment terms to make sure you’re paying the correct amount each month. You might need to contact your new lender or first set up a new online account.
• Set up autopay. If you were enrolled in autopay before, you’ll likely have to set it up again.
• File any paperwork. It’s possible for important documents to get lost in the shuffle, especially if they aren’t digital. Keep a record of old statements, promissory notes and any important documents that you may need to access should something go wrong.

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Bottom line

Learning that your lender has closed its doors might scare you, but it generally won’t affect your personal finances much. You’ll still have to repay your loan, typically with the same terms and conditions. However, the details can vary by lender and situation, so reach out to your old and new lenders to find out specific next steps.

Learn more about lenders that are still up and running in our comprehensive guide to personal loans.

Frequently asked questions

• How do I contact a lender that's shut down or no longer in business?

  If your lender is still collecting repayments, you should be able to call its customer support. If not, you will be able to contact your new lender.

• Will I get the same perks with my new lender?

  It depends on the perk. If your new lender offers a similar perk or discount, it’s worth asking if you’re eligible.

• What happens to my money if my bank closes?

  In the case of a bank failure, the Canada Deposit Insurance Corporation (CDIC) covers deposits up to $100,000 at all eligible Canadian banks and credit unions. This insurance applies to chequings, savings, term deposits with maturity levels of 5 years or less, money orders, bank drafts and cheques.

• Will the way my variable rates are calculated change if my lender goes out of business?

  Generally, no. Your interest rate might be affected if you’re paying off your loan to a new lender with different terms and conditions. If there is any change to your rates, your lender should formally tell you first.

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