Why Do Banks Sell Your Car Loan to Other Banks?

The process of buying a new car is complicated by all of the variables involved, including the make and model of the car, the price you pay and the warranty. Financing your purchase only adds to the confusion. Buyers can have any number of misconceptions about how auto loans work, and what happens to them once issued.

Banks as Lenders

When you finance a new car, you may handle all of your negotiations, including arranging a financing deal, through the dealer. However, dealers do not finance vehicles themselves. Instead, dealers receive cash for the full purchase price, and a bank steps in to loan you the money. This is why when you start making payments on your car, you send your checks to a bank rather than the dealer. The dealer uses the money to buy more cars to sell, and the bank collects interest on each of your payments.

Selling Loans

In some cases your bank will choose to sell your loan to another bank, which will continue collecting interest. You may see very little change other than a notification from the lender or a new address on the envelopes you submit your payments in. Banks sell their loans to other banks to collect cash that they can use to make more loans to new borrowers. Banks charge one another fees for these sales, allowing the first bank that held your loan to still profit from it but without waiting for you to pay off your loan in full over the course of several more years.

Reducing Risk

Another reason that your bank may sell your auto loan to another bank is to eliminate the risk that your loan represents. Even though your lender examined your credit score and verified your income before agreeing to make the loan, there is still a possibility that you'll become unable to make your payments. By selling the loan for an upfront cash payment, the lender passes the risk on and guarantees a return on its investment. Meanwhile the bank that buys the loan can usually earn more by holding your loan and waiting for interest to arrive over time, assuming that you pay off your car on schedule.

Secondary Markets

Your loan can pass through the hands of any number of banks before it's paid off. In some cases, banks that hold loans such as auto loans bundle many loans together into securities and sell them into secondary markets. This allows investors, including banks, businesses and private individuals, to own a piece of your loan. You continue paying interest to the bank, but the bank uses this money to pay the owners of the loan-backed securities. Selling loans through secondary markets has the same benefits for your lender as getting cash up front and reducing risk.