Pre-Payment Penalties If Your Loan Is Sold To Another Lender

By Dan Melson on May 2, 2007 10:01 AM | Permalink | Comments (0)

my question today is about what happens to the prepayment penalty if the loan is sold to someone else? A friend of mine told me that he called and was told there was no prepayment penalty with the new lender but I'm skeptical. Why would the terms of the loan change just because someone else is servicing it?

They wouldn't, unless the state your friend lives in has an unusual law.

Your friend hasn't paid off the loan. Therefore, there will be no pre-payment penalty assessed simply because the original lender sold off the rights to receive the payments.

On the other hand, just because the right to receive payments has been sold does not invalidate or alter the terms of the contract, among which is the pre-payment penalty clause. If your friend does something which would have caused the penalty to be assessed with the original lender, it will still be due to the replacement lender.

The fact that a loan has been sold does not cause the penalty to be assessed. Otherwise, people would be assessed a penalty for something under control of the bank, not themselves. On the other hand, it doesn't let you off the hook of penalty clause you agree to, either.

Caveat Emptor

Article UPDATED here

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