What is assume balance or pasalo? Is it safe?

Car owners who are unable to keep up with the monthly amortization of their auto loan would opt for someone else to shoulder the payment of the vehicle instead of losing money when the bank or financial institution exercises its right to repossess the vehicle. They'd rather enter into an "assume balance" arrangement or what they call "pasalo" in the hopes of recovering a portion of the paid monthly amortization. But what exactly is this scheme all about?

Assume balance, also known as pasalo, is a type of sale in which a car with an existing auto loan is sold to the buyer on the condition that the buyer assumes responsibility for continuing to pay the monthly amortization until the loan is paid off in full. It's basically selling the vehicle even if the loan isn't completely paid off.

In this arrangement, the buyer pays a lump sum based on the car's condition, market value, and total paid monthly amortization. This amount is often much lower than the traditional down payment for financing, making it more appealing. Following payment, the buyer then assumes the responsibility for paying the remaining monthly amortization. Though banks discourage this practice, it has become popular despite the fact that auto loans are not assumable per se, making the transaction becomes illegal.

However, what makes the transaction legal is when the seller (or the car owner with an existing auto loan) seeks permission from the lender to arrange such a transaction in order to avoid defaulting on the auto loan. If the lender agrees, the buyer will be subjected to the same credit investigation. They must also submit the same documentation as the original borrower did.

Is the assume balance safe?

Though the "assume balance" is a win-win solution for both the seller and the buyer, as well as the bank, there are some risks associated with this arrangement.

On the seller’s side, it is important to seek permission from the lender before entering this transaction as the lender may sue you legally for selling and removing the vehicle from your premises without their consent because it violates the Chattel Mortgage Agreement, and you'll be the one who ends up with a bad credit rating if the buyer fails to make the monthly payments. As long as you obtain consent, the lender will go after the buyer instead of the seller once the buyer defaults on the monthly amortization.

On the buyer’s side, it is also important to have the lender’s consent as the vehicle can be legally sold to you. To protect your purchase, sign a Deed of Absolute Sale, but make sure it mentions that the vehicle is still mortgaged to the lender and the payment terms. This will allow you to keep ownership of the unit, subject to the lender mortgage, which means you'll assume the seller's remaining loan obligation. Furthermore, instead of sending monthly payments to the seller, agree to pay the bank directly, if possible, thus the payment is not dependent on the seller’s will.

Is it still worth it to enter an "assume balance" sale? Yes, but make sure you comply with all legal requirements. A simple contract of sale will not save you; if it breaches the law, it will be unenforceable in a court of law. Prior to closing the deal, both buyers and sellers must exercise due diligence. It will be safe and lawful as long as you receive the lender's approval with the relevant documentation.