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What is a Loan Buyout?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 18 September 2016
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Sometimes referred to as a consumer loan buyout, a loan buyout is a type of financial transaction in which loans issued by financial institutions are sold, sometimes at a discount, to new owners. At times, a number of loans are bundled into a single package and sold as a security to investors. The idea is for the originator of the loans to receive enough compensation from the buyout to cover expenses and make a small amount of profit, while the buyer or investor eventually recoups a larger return as the loans are paid off according to the original terms. A loan buyout also transfers the risk involved with the loans to the new owner, who stands to incur losses if the debtors associated with the purchased loans should default for some reason.

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The idea of a loan buyout is very common in many business settings. Mortgages, car loans, and even credit card debt is sometimes bundled into this form of buyout and offered to investors as a means of benefiting from the returns earned from those financial debt instruments in years to come. For investors who participate in a loan buyout, the idea is often to create ongoing revenue streams that eventually cover the total amount paid for the bundled loans, while also providing income from the interest that the debtor repays along with the principal. Since the loans are often purchased at a slight discount over the actual remaining balance due at the time of the buyout takes place, this only helps to increase the returns that the investor eventually realizes from the venture.

A loan buyout is also beneficial to the institution that originally granted the loan. This is because the lender does not have to wait for the loan to be repaid according to terms in order to recoup the full investment. Often, the loan buyout is at a price that is slightly under the face value of the loan and the projected amount of interest that is remaining due at the time of the purchase. The lender has the benefit of receiving the lump sum invested in the loan earlier, often makes a small amount back over the actual costs associated with the loan itself, and is free to use those funds to underwrite additional loans that generate additional revenue. Best of all, the lender no longer is at risk of default on the loans that are sold to investors.

In many nations, it is not unusual for financial institutions to use the loan buyout model with private and commercial mortgages, car loans, and other types of lending activity. For the debtors themselves, the sale may mean little in the way of change, other than the need to remit the monthly installment payments to a different entity with a different remittance address. Typically, the actual terms of the loan do not change, meaning that the debtor still pays the same rate of interest, has the same repayment schedule, and is subject to the same rights and responsibilities as originally contracted.

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