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Borrowing from your bank or credit union can get you lower rates and speed up the application process. But most borrowers don't know that these same financial institutions can seize money from your accounts if you miss a payment. Luckily, there are restrictions on what types of funds it can seize — and easy ways to avoid signing a contract with a right to offset clause.
A right to offset clause means a bank or credit union can take money from your accounts held at that same institution to cover missed loan repayments. It's also known as a right to set off or a setoff clause.
It's a clause in a loan contract, but only if you currently have a deposit account at that same bank or credit union — like a checking or savings account. Generally, lenders include a right to offset clause in contracts when they think there's a risk you'll default on the loan.
If your loan becomes delinquent — usually 15 days after missing a payment — a bank or credit union withdraws the amount you owe from another account that it holds. Typically, it doesn't have to give any notice.
The right to offset doesn't apply to credit card accounts, according to federal law. Some states have limits to what types of income your bank can withdraw from your account as a right to offset. These can include:
If you find yourself behind on a loan payment from your bank or credit union, check with your state law to find out how your accounts are protected.
A right to offset can make a bad financial situation worse. If you have a financial emergency and can't afford your monthly bills, the right to offset makes sure that your loan gets paid off no matter what.
This means you might not have money to cover the basics, like gas, utilities, rent or groceries. In the most extreme cases, you could end up having to take out an expensive short-term loan just to get by. These can trigger a cycle of debt, especially if you need extra money each month.
There are a few ways to avoid a right to offset:
Take these steps if you find your lender took money from your bank account to cover your loan payment:
Banks and credit unions usually only use the right to offset clause as a last resort. But it can set you up to fall into even more debt when you're already struggling with repayments. Find out more about how loans work — and compare lenders that aren't your bank — by reading our guide to personal loans.
An offset bank account is a bank account that's linked to your loan. Your lender considers those funds as going toward your loan repayments — so you don't have to pay interest on that part of the balance. For example, if you had a $50,000 loan with a $10,000 offset account, you'd only pay interest on a $40,000 balance. It's most common with mortgages and not very common with other types of personal loans.
That depends on your state's laws. While your Social Security benefits are generally protected, pensions might not be.
It's similar, but not quite the same. Offset only applies to loans you have with a lender that holds a deposit account in your name. Garnishment is when a lender, usually the government, can take funds from any bank account — including wages, tax returns and government benefits — if you default on a loan.
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