Personal loans can be a powerful borrowing tool. But sometimes, our financial lives take an unexpected turn. That's when you may be thinking about contacting your lender, seeking to return or cancel a personal loan to escape the burden of the monthly payments.
And what about loan forgiveness or bankruptcy?
Sit tight. Let's consider your options.
First off, do you really have a personal loan, or is it something else?
Borrowing money can be complicated. There is a lot of jargon to deal with. The lender knows all about what's going on, but this may not be your thing. During the loan application process, paperwork was flying everywhere. All you know is you needed the money, your credit score was OK, and the lender was willing to give you a loan approval and put the cash in your bank account.
There are a lot of different loan types. A personal loan is usually offered to a borrower based on their creditworthiness. There is typically no property involved, such as a home, vehicle or real estate. It's called an unsecured personal loan because, in effect, your signature guarantees the loan, nothing else.
If the loan you're dealing with is related to buying or refinancing a home, accessing the equity in your house or buying a car, it may be a different loan type altogether. So that's the first step. Make sure you're dealing with a personal loan — rather than a home mortgage, home equity loan or line of credit, or car loan.
It's possible that you have a secured personal loan backed by something you own. That's a fine distinction from a home mortgage or vehicle loan. Those loans are used to buy something. A secured personal loan uses something you already own to guarantee the loan. You may hear them called "title loans."
Every type of loan has different rules and regulations. And lender policies vary with each one, too.
How to cancel a personal loan after signing
If you have completed a loan application, signed all of the lender paperwork, have the personal loan proceeds in hand, and are looking for a loan cancellation, your first step is to review the personal loan agreement. The answer you're seeking may be right there in the loan contract you signed.
Lender agreements, repayment terms and laws vary by type of loan, as we've mentioned.
Some lenders may offer a short period of time where you will be allowed to return the money you borrowed, plus interest due and perhaps a prepayment penalty. You know, there will almost always be additional fees. If so, that's likely to be stated in the loan agreement. In that case, it's more a matter of repaying the total loan amount rather than actually canceling it. And it will likely cost more than the money you received, so be prepared for that.
What if you haven't signed the personal loan agreement yet?
Canceling a personal loan will be much more likely if you haven't received a loan approval, signed the loan contract, or received the total loan amount yet. However, it won't necessarily be easy breezy. And once again, there are likely to be fees involved. Yes, there could be additional fees even if you haven't received the money or agreed to anything.
Two likely charges lenders will levy: an origination fee and an application fee. There could also be a credit history fee, paperwork fees, and other charges just for beginning the application process.
If your goal is to avoid the looming monthly payments once the loan agreement is signed, then there will likely be a cost.
Understanding the 3-day cancellation rule
You may have heard of the three-day cancellation rule or the "right of rescission." The three-day cancellation is a consumer protection law contained in the Truth in Lending Act. It grants borrowers three business days, including Saturdays, to reconsider a loan decision. This cancellation rule only applies when you use your primary residence as collateral for a loan. It usually applies to mortgage loans or home equity loans and might apply to a personal loan if you pledged your home to back the loan.
Can a personal loan be forgiven?
Personal loan forgiveness may be another possible option you've heard about. Debt forgiveness is when a lender writes off or erases some or all of a loan balance you owe.
However, loan forgiveness is rare and doesn't commonly apply to personal loans. You may have heard of federal student loans being forgiven, but personal loan lenders don't usually forgive a loan. They may negotiate a lower payoff in a debt settlement action, but forgiveness is not generally in a lender's vocabulary.
Considering bankruptcy to clear a personal loan
It may seem drastic, but you may be thinking of declaring bankruptcy to get out from under a personal loan. Bankruptcy is a serious decision, but it's not the end of the world. Some or all of your debts may be discharged; however, there is usually a 7-10 year impact on your credit profile. Sometimes even longer.
You may also want to consider credit counseling or debt-relief settlement programs.
Can you get a personal loan after bankruptcy?
On the opposite end of bankruptcy, say you've filed for bankruptcy before and are now looking to get a personal loan. Is that even possible?
With the long-term impact of bankruptcy, it is essential to try and rebuild your credit history over time. However, obtaining a personal loan with a low credit score will take a lot of work. If you pay your bills on time and show a solid repayment history on the credit you can acquire, eventually, you will be able to get credit cards and other things like a personal loan. Just know that the interest rate you'll pay on any debt after bankruptcy will likely be high.
Other considerations
If you are able to cancel or return a loan — or decide to decline the terms of the loan before signing the loan contract — remember your credit score may take a hit. A hard credit bureau inquiry was made when you made your loan application. And without making loan payments, there is nothing to improve your credit history.
However, you won't have monthly payments either. Maybe that's precisely what you needed most.
