Can I Cancel a Loan After Receiving the Money?
Learn if and how you can cancel a loan after receiving the money. This guide clarifies your rights and the procedures involved for various loan types.
The ability to cancel a loan after signing the agreement and receiving the money depends significantly on the specific type of loan and the consumer protection laws that apply. While some loans offer a defined period for cancellation, others do not provide such a right once the transaction is complete. The terms and conditions outlined in the loan agreement are important in determining any cancellation options after funding.
Understanding the Right to Cancel
A specific legal protection known as the “right of rescission” allows borrowers to cancel certain credit transactions without financial penalty after the loan documents are signed. This right functions as an important consumer safeguard, providing a brief period for borrowers to reconsider a significant financial commitment. The Truth in Lending Act (TILA) is the federal law that establishes this right, ensuring transparency and offering consumers time to evaluate loan terms.
The right of rescission applies to specific types of loans that are secured by a borrower’s primary residence. These commonly include home equity loans, home equity lines of credit (HELOCs), and refinance mortgages where the new loan is secured by the borrower’s existing principal dwelling. This consumer protection is intended for transactions where a security interest is placed on an existing home, not for the initial purchase of a home.
The timeframe for exercising this right is three business days. This three-day period begins after the latest of three events: the signing of the loan contract, the receipt of the Truth-in-Lending disclosures, or the receipt of two copies of the notice explaining the right to rescind. For rescission, “business days” include Saturdays but exclude Sundays and federal public holidays. Should the lender fail to provide the required disclosures or the notice of the right to rescind, the cancellation period can be extended for up to three years.
How to Exercise Your Right to Cancel
When the right of rescission applies, borrowers must follow specific procedural steps to effectively cancel the loan. The cancellation must be communicated to the lender in writing. Simply calling or verbally informing the lender is not sufficient to exercise this right. Borrowers can use a specific form provided by the lender for rescission or create their own written letter clearly stating their intent to cancel the loan.
The written notice must be delivered to the lender within the strict three-business-day timeframe, by midnight of the third business day. It is advisable to send the notice via certified mail with a return receipt requested, as this provides verifiable proof of mailing and delivery within the required period. The notice is considered given when it is mailed or filed for telegraphic transmission.
Upon receiving a valid notice of rescission, the lender has responsibilities to fulfill within a specific timeframe. Within 20 calendar days after receiving the notice, the lender must return any money or property the borrower paid in connection with the transaction, such as application fees or closing costs. Additionally, the lender is required to take all necessary actions to terminate any security interest they held in the borrower’s property. Once the lender has met these obligations, the borrower is then responsible for returning the loan funds or any property received from the lender.
Loans Without a Specific Right of Rescission
Many types of loans do not include a federal right of rescission after funds have been received. This means that once the loan agreement is finalized and money is disbursed, there is no automatic legal right to cancel the transaction. Understanding these distinctions is important for borrowers considering different financing options.
The right of rescission does not apply to purchase-money mortgages, which are loans used to acquire a new home. Auto loans do not fall under this federal cancellation right. Once an auto loan agreement is signed and the vehicle is acquired, cancellation is not an option.
Personal loans, which are unsecured or secured by assets other than a primary residence, also lack a federal right of rescission. Student loans and business loans are other common examples of financial products that do not come with a federal right of rescission. Loans secured by vacation or investment properties also fall outside the scope of this federal protection.