In the Philippines, the secondary market for vehicles often features "Assume Balance" or "Pasalo" schemes. While these deals appear financially attractive, they frequently occur without the express written consent of the financing bank or lender. Engaging in such a transaction creates a complex web of legal risks for the buyer, primarily because it bypasses the formal contractual obligations of the original loan.
The Legal Framework: Why Consent Matters
Most vehicle loans in the Philippines are secured by a Chattel Mortgage or a Secured Transaction Agreement. Under these contracts, the registered owner (the seller) is prohibited from selling, disposing of, or encumbering the vehicle without the prior written consent of the mortgagee (the bank).
- Contractual Privity: The contract exists solely between the bank and the original borrower. A buyer who "assumes" the balance without bank approval is a legal stranger to the lender.
- The "Double Sale" Risk: Since the bank still holds the original Certificate of Registration (CR) and the mortgage is often annotated thereon, the buyer cannot legally transfer the ownership to their name until the loan is fully paid and the mortgage is released.
Risks to the Buyer
Buying a vehicle without the lender's "Okay" is a high-stakes gamble. Here are the primary risks:
1. Lack of Legal Ownership
Even if you possess the car and have a notarized "Deed of Sale with Assumption of Mortgage," the law does not recognize you as the owner. The Land Transportation Office (LTO) will not transfer the registration to your name without a Release of Chattel Mortgage from the bank, which will only be issued to the original borrower.
2. The Threat of Repossession
If the original seller—who remains the debtor in the eyes of the bank—fails to remit your payments or defaults on other obligations, the bank has the right to repossess the vehicle.
Note: The bank does not care who is currently driving the car; they follow the collateral. As a "pasalo" buyer, you have no legal standing to prevent a bank seizure.
3. Criminal Liability (Estafa and Carnapping)
Under Article 319 of the Revised Penal Code, a person who knowingly removes or sells mortgaged property without the consent of the mortgagee can be charged with a form of Estafa. Furthermore, if the bank or the original owner claims the car was taken or withheld unlawfully, the buyer could find themselves entangled in Republic Act No. 10883 (The New Anti-Carnapping Act).
4. Insurance Complications
Insurance policies are typically tied to the registered owner. In the event of a total loss or a major accident, the check will be issued to the bank or the original borrower. A buyer may find it nearly impossible to claim insurance proceeds without the seller's cooperation.
Does the Buyer Have Any Rights?
While the buyer’s position is weak against the bank, they do have limited recourse against the seller:
- Action for Sum of Money: If the car is repossessed due to the seller's fault, the buyer can sue the seller to recover the payments made under the principle of unjust enrichment.
- Specific Performance: If the loan is fully paid, the buyer can legally compel the seller to execute the final Deed of Sale and surrender the necessary documents to transfer the title.
Comparison: Formal Transfer vs. "Pasalo"
| Feature | Formal Bank Transfer | "Assume Balance" (Unconsented) |
|---|---|---|
| Legality | Fully recognized by Law/Bank | Grey area/Contractual violation |
| Registration | Transferrable to Buyer's name | Remains in Seller's name |
| Security | High; Buyer is the new owner | Low; Risk of repossession |
| Approval | Subject to credit investigation | No credit check required |
Protecting Your Interests
If you are considering a vehicle under loan, the only "safe" path is to involve the lender. This usually involves a Change of Borrower application. If the bank approves, a new contract is signed, and you become the legitimate owner and debtor.
If you have already entered into an informal agreement, ensure you have:
- A comprehensive Special Power of Attorney (SPA) authorizing you to deal with the bank and the LTO.
- Clear records of all payments made to the seller or the bank.
- An acknowledgment from the seller that the sale is final upon full payment of the loan.
Would you like me to draft a checklist of documents you should request from a seller before considering an "assume balance" deal?