What happens when a loan company goes out of business

If the collapse of Silicon Valley Bank taught us anything, it’s that your lender isn’t guaranteed to still be in business for the full term of your loan. While you won’t be able to take out a new loan with that lender, having a lender shut down doesn’t necessarily change the repayment process — though it can.

The same goes for when another company buys out or merges with your lender. You likely won’t be able to take out another loan immediately. And even if the new company offers loans, there will likely be different rates, terms or eligibility requirements.

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

You still have to repay your loan even if your lender shuts down. 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 defunct. That’s because your debt is typically up for sale when a lender closes. Another company simply buys your loan and starts receiving your repayments. In some cases, your loan can fall under the control of the Federal Debt Insurance Corporation (FDIC).

Either way, your loan terms will likely carry over to a new company — with the same APR and repayment terms.

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.

Payments that are more than 30 days late can show up as delinquencies on your credit report, sometimes resulting in a drop of up to 110 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 more.

List of recently out-of-business lenders

Lender	When it shut down	What happened	Alternatives
Silicon Valley Bank (SVB)	2023	Didn’t have enough liquid funds to cover deposit requests. The FDIC took over SVB and seized its assets in March 2023.	Lendio’s tech-friendly business loan marketplace can help you find the right fintech or traditional business lender within minutes.
Signature Bank	2023	Didn’t have enough liquid funds to cover deposit requests. The FDIC took over FDIC and Signature Bank.	SmartBiz is a business loan market place and SBA loan packaging service that can help small businesses find the right bank loan quickly.
LendUp	2022	The CFPB ordered it to cease operations after several lawsuits over misleading marketing, violating military lending laws and violating consent orders from the CFPB.	MoneyLion Instacash offers quick cash advances without high rates of an installment loan. Learn about more Lendup alternatives.
Sprout Mortgage	2022	Struggled to sell loans to investors and issue loans after the federal reserve raised interest rates.	Veterans United specializes in serving the military community, offering a wide range of mortgages across all 50 states.
First Guaranty Mortgage	2022	Filed for Chapter 11 due to a weak mortgage and housing market — a reaction to the Federal Reserve interest rate increases.	First Horizon offers mortgages to residents of 12 states with no prepayment fee.
Float	2017	Couldn’t raise enough funds to continue operating.	Brigit offers automatic overdraft protection for up to $250 on any bank account, for a monthly fee. Or, open up an account with Chime for no-fee overdraft up to $200 through its SpotMe service.
Vouch	2016	Wasn’t profitable enough to stay in business.	Upstart specializes in personal loans for people who are just starting out their careers.

Who is most likely to be researching what happens if a lender goes out of business?

Finder data suggests that men aged 25-34 are most likely to be researching this topic.

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 own a line of credit you’d like to tap into or want to apply for a new loan.

After funding ceases, one of three things happen:

1. Your lender continues to collect repayments until every loan is paid off.
2. A servicer or another lender buys your lender’s portfolio.
3. The FDIC takes over your loan until it can sell your lender, typically to a 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 — unless your lender charged rates that are higher than your state’s legal limits, in which case your rates may come down.

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.

Why do lenders shut down?

Any sudden change to the economy can cause a lender to shut down — such as rapidly rising interest rates. However, the most common reason for closures depends on the type of lender:

• Regional banks haven’t been required to meet the same liquidity requirements as big banks since 2019. This means that if too many customers try to withdraw money from their accounts at the same time — known as a bank run — the bank will collapse.
• Community banks also face the risk of bank runs, but they’re more likely to be bought out by a regional bank or even another community bank.
• Mortgage lenders can be very sensitive to interest rates and the housing market. Rate increases and a slowdown in home buying can cause some smaller lenders to close.
• Online lenders are relatively new to the lending space and many are in the startup phase. Many shut down simply because they didn’t raise enough money to make it to the next growth stage, or can’t handle the change in interest rates.
• Payday and installment lenders often close because they violated consumer protection laws by charging higher rates and fees than legally allowed. Some register as tribal lenders to get around lending laws, but states can challenge that exemption.

The Federal Deposit Insurance Incorporation, or FDIC, publishes a searchable list of failed banks, which it updates regularly.

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 servicer. Reach out to both your new and old servicer to 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 servicer or first set up a new online account.
• Set up autopay. If you were enrolled in autopay before, you might 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 to access should something go awry.

Why are people getting loans?

The most common reason Americans take out a personal loan is for debt consolidation (38%) purposes. This is followed by home improvements (35%) and medical expenses and utilities/bills (25%).

What happens when another company buys my lender?

If your lender is bought out by or merges with another provider, it will send you detailed instructions of what to expect in advance. Acquisitions and mergers are common in the finance space and typically take at least a year.

You’ll still have the same rates and terms that you agreed to in the loan contract. But how you make payments may change. For example, when American Express bought out online business lender Kabbage, customers were required to make payments through Kabbage’s servicer, KServicing.

However, new loans may not be immediately available. And when they become available, you likely won’t see the same rates, terms and requirements. For example, when SunTrust and BB&T merged to form Truist Bank in 2019, it eventually offered a new product different from what was previously available through SunTrust or BB&T.

What happens if my lender stops offering loans?

Sometimes banks and other financial institutions stop offering loans, even though they still remain open. In most cases, you’ll continue to make payments as usual, though you won’t be able to apply for another loan in the future. For example, Marcus by Goldman Sachs customers will continue to pay back loans through Marcus, but they won’t be eligible for another loan.

In some cases, a bank will sell its loans to another lender. That’s what happened when HSBC decided to move out of the consumer financing space, selling its consumer and business loans to Citizens Bank and Cathay Bank in 2021.

Like with mergers and acquisitions, this is typically a drawn-out process and you should receive several notices from both your former and current lender about what steps to take, if any.

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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 servicer to find out specific next steps.

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