What happens when a loan company goes out of business?

It used to be the case that your local bank or building society was the only place to get a loan. But with the rise of fintech lenders, it’s now very easy to get financing without leaving your home. But what if one of these companies (or one of its more traditional counterparts, for that matter) simply fails?

Some online lenders go bust after unsuccessfully experimenting with alternative, non-standard types of financing. Case in point, the collapse of payday loans company Wonga.

Other lenders might be shut down for legal reasons, and some startups simply can’t make it through those tough first few years. And anyone who remembers the 2008 financial crisis knows that big-name banks can go South too.

We take a look at what happens when a lender closes 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 payments, rates and more. 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 bust. That’s because any outstanding loans owed to the collapsed company are effectively its assets, that will be sold off by administrators to repay the company’s creditors. Another company simply buys your loan and starts receiving your repayments, with the same terms (unless otherwise specified).

What happens if I stop making repayments?

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

As well has significantly hurting your credit record, payments that are more than 30 days late can ultimately lead to a county court judgement (CCJ). These are in turn likely to have a further serious impact on your credit report. Any defaults could follow you around for years to come, making it difficult to qualify for future loans, credit cards, mortgages and more.

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

The most immediate action is that your lender stops funding loans. This typically won’t affect you unless you want to apply for a new loan or new financial product.

After funding ceases, one of three things happen:

1. Your lender continues to collect repayments until every loan is paid off.
2. Another lender buys your lender’s portfolio.
3. The Financial Conduct Authority (FCA) will outline certain criteria and regulations which will ensure existing debts are paid off by customers to a new lender or bank.

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.

Borrower checklist

When a new company buys your loan, here’s a few ways to keep on top of what you owe:

• Contact your old or new provider. Reaching out to both your new and old loan provider can help you better understand what to expect and how to prepare yourself. But even reaching out to one can give you an idea of what will happen with your loan.
• 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.
• 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 provider or first set up a new online account.
• 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 and any important documents to access should something go awry.

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Bottom line

Learning that your lender has closed its doors might rattle 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. But the details can vary by lender and situation, so reach out to your old and new provider to find out specific next steps.

Learn more about lenders that are still up and running and the services they can offer 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?

  You have a couple of choices. If your lender is still collecting repayments, you should be able to call its customer support. You can also check their site homepage for updates. Usually, the Financial Conduct Authority (FCA) and Financial Ombudsman Service will issue updates too. If all else fails, you should seek guidance from the MoneyHelper.

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

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

• Will the way my interest 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 provider with different terms and conditions. If there is any change to your rates, your provider should formally tell you first.