Car Loan Assumption in the Philippines: Bank Approval, Deed of Sale, and Risks

This article explains how “assume balance” arrangements for motor vehicles work in the Philippines—what’s legal, what’s risky, and how to do it correctly. It is general information, not legal advice.

1) What “assume balance” really means

In the Philippine market, “assume balance,” “pasalo,” or “loan assumption” usually refers to one of two very different transactions:

Informal turnover (no bank approval). The original borrower (“seller”) hands over the car and monthly payments to a new payer (“buyer”), often with a one-page “assumption” letter and a notarized deed of sale. The bank is not a party. The loan and all legal liability stay with the seller.
Formal loan transfer with bank approval. The bank consents to replace the borrower after credit evaluation. Documents effect either a novation (new borrower, new or continued terms) or an assignment (rights/obligations transferred with the bank’s express consent). The bank issues new loan papers and keeps/updates the chattel mortgage and encumbrance on LTO records.

Only the second is legally sound. The first exposes both parties to significant civil and even criminal risk.

2) Legal framework (key concepts and statutes)

Chattel Mortgage & Encumbrance. Most auto loans are secured by a chattel mortgage over the vehicle. It is annotated on the Certificate of Registration (CR) with LTO and registered (historically under the Chattel Mortgage Law, Act No. 1508; now harmonized with the Personal Property Security Act (PPSA), RA 11057 and its notice registry). Until the bank issues a release and the encumbrance is cancelled, the car remains encumbered.
Novation (Civil Code Arts. 1291–1304). Replacing the debtor requires the creditor’s (bank’s) consent. Without consent, a private “assumption” between buyer and seller does not bind the bank.
Assignment of Credits (Civil Code Arts. 1624+). The bank (as creditor) may assign its rights, or consent to a debtor substitution. Again, consent is key.
Criminal exposure—sale of mortgaged property (RPC Art. 319[2]). Selling or transferring a mortgaged movable without the mortgagee’s (bank’s) written consent may be penalized. “Assume balance” done privately can trigger this.
Replevin/Repossession. Upon default or breach of covenants (e.g., unauthorized transfer), the bank may seize the car through judicial replevin or contractual remedies.
LTO rules. Transfer of ownership of a registered vehicle requires a notarized Deed of Sale (DOS) and compliance (PNP-HPG clearance, fees, etc.). But if an encumbrance exists, LTO will not complete transfer unless bank consent and proper annotations are in order.

3) Correct pathways to a legitimate assumption

A) Bank-approved debtor substitution (preferred)

Pre-clearance with bank. Seller asks whether loan transfers are allowed and what conditions apply (seasoning, clean payment history, fees).
Buyer’s credit evaluation. Bank underwrites the buyer like a new loan (income docs, credit checks, valuation of unit).
Bank consent and documentation. Bank issues a Consent to Assumption/Novation, and executes:
- Novation Agreement (debtor substitution; terms may be reset), or
- Assumption of Loan Agreement (bank joins to consent), and
- New/Amended Promissory Note and Chattel Mortgage (either a new CM or an amendment; mortgage remains annotated).
Insurance endorsements. Comprehensive (and CTPL) re-endorsed to the bank with the new owner as insured and bank as loss payee.
LTO updates. File change-of-ownership with LTO. The encumbrance annotation persists under the bank until loan completion; the registered owner becomes the buyer.

Effect: The buyer becomes the legal borrower. The seller is released (unless the bank requires a continuing suretyship for a period—which should be resisted or time-limited).

B) Bank-mediated sale (loan payoff + take-out)

Sometimes the buyer obtains a fresh loan from the same or another bank to pay off the seller’s balance. Steps:

Buyer’s bank issues payoff to seller’s bank.
Seller’s bank releases Cancellation of Chattel Mortgage and Release of Encumbrance.
Buyer’s bank registers a new chattel mortgage and buyer registers ownership at LTO.

Effect: Clean title passes; new loan stands on its own.

4) What not to do (and why it’s risky)

Private DOS + handover + buyer pays the bank (no consent).
- The loan remains in seller’s name; any late/missed payments hit the seller’s credit and may trigger repossession even if the buyer has been paying informally.
- Criminal risk: Unauthorized transfer of mortgaged property (Art. 319).
- Insurance and liability: If an accident occurs, the listed insured/registered owner and the bank’s rights complicate claims; the buyer may lack insurable interest or proper endorsements.
- LTO transfer blocks: Encumbrance prevents full transfer; at best, you get a paper DOS floating against an encumbered unit.
Accepting “assumption fee” without bank approval. Classic scam pattern: buyer pays a lump sum, later the bank repossesses because the transfer never legally occurred.

5) The Deed of Sale (when it’s part of a bank-approved process)

A DOS is still used to transfer ownership interests between seller and buyer, together with bank documents. Best practice contents:

Parties & vehicle details. Full names, government IDs, address; plate/conduction, engine/chassis, CR/OR numbers, mileage, condition.
Encumbrance disclosure. Recite the existing chattel mortgage: bank name, loan number, outstanding principal/arrears as of a stated date.
Condition precedent: “This sale takes effect only upon the bank’s written consent and execution of novation/assumption documents; failing which, this DOS is void and payments are refundable (less agreed costs).”
Price & allocation. Down payment/assumption fee (if any), and who pays transfer, bank, and LTO fees.
Warranties. Title, non-involvement in crime, no tampering of engine/chassis, no hidden liens other than disclosed encumbrance, odometer honesty (as-is/where-is caveat still common).
Risk & possession. When possession passes; who bears risk of loss before bank consent; responsibility for traffic violations, tolls, and taxes cut-off date.
Insurance & keys/documents. Turnover list (original CR/OR or e-CR/e-OR access, owner’s manual, duplicate keys).
Notarization. DOS must be notarized; attach IDs and proof of authority if corporate.

Important: The DOS should not “override” the bank’s rights. Use wording that recognizes the encumbrance and the need for bank consent.

6) LTO and police clearance essentials

For a complete change of registered ownership with an active encumbrance, LTO typically requires:

Bank consent and mortgage documents (new/amended CM or annotated consent), or Release of Encumbrance if loan paid or taken out.
Notarized DOS (seller→buyer) or Bank’s deed if the bank is the transferor.
PNP-HPG MV Clearance, emission test, insurance, valid IDs, and payment of fees/penalties (if any).
Updated annotation. Encumbrance stays in favor of the bank until full payment; LTO will reflect buyer as new registered owner with the same encumbrance.

Note: Exact checklists and fees vary by LTO office; bring originals and photocopies, and expect verification (stencil rubbing, etc.).

7) Fees, taxes, and costs (what to expect)

Bank charges: Processing/assumption fee, credit investigation fee, document preparation, and possible repricing of interest.
Documentary Stamp Tax (DST): Loans, mortgages, and certain assignments attract DST under the Tax Code; banks usually compute and collect this together with registration fees.
LTO fees: Transfer of ownership, annotation/cancellation of mortgage, penalties (if late), plates/stickers if applicable.
Insurance: CTPL reissuance and comprehensive policy endorsement to new owner; premium adjustments mid-term are common.

Avoid quoting fixed amounts without a bank/LTO computation because rates change and depend on loan size and locality.

8) Practical due diligence (for both seller and buyer)

For the seller

Get a written policy from your bank on assumptions.
Require the buyer to apply with the bank first; do not release the car until the bank approves and documents are executed.
Keep the vehicle fully insured with the bank as loss payee until turnover.
Use an escrow-style sequence: bank approval → execute papers → confirm insurance endorsement → LTO filing → release unit/keys.

For the buyer

Verify the authenticity of the CR/OR (or e-CR/e-OR), plate vs. VIN, and the encumbrance annotation.
Ask the bank for a payoff letter and official statement of account; verify no arrears.
Insist on bank-signed novation/assumption; never rely solely on a private DOS.
Check for traffic fines, emission compliance, and prior accidents; confirm insurance claim history if possible.
Budget for repriced interest or new loan terms; compare take-out vs. assumption economics.

9) Risk map (what can go wrong)

Credit denial: If the bank rejects the buyer, any “assumption” money should be refundable under the DOS’s condition-precedent clause.
Hidden arrears or tampered VIN: Triggers denial, criminal investigation, or repossession.
Payment slippage after informal turnover: Bank accelerates the loan; seller’s credit is ruined; unit repossessed from the buyer.
Accident before policy endorsements: Coverage disputes or denial.
Unauthorized transfer finding: Bank may pursue Article 319 charges in addition to civil remedies.

10) Templates & sample protective wording (snippets)

Condition-precedent clause

“This sale shall take effect only upon [Bank]’s written consent and execution of a novation/assumption agreement substituting Buyer as debtor. Until then, legal title and responsibility remain with Seller, and possession shall not be delivered to Buyer.”

Encumbrance acknowledgment

“The Parties acknowledge that the Vehicle is subject to a Chattel Mortgage in favor of [Bank], Loan No. ______, annotated on the Certificate of Registration. The Parties undertake to obtain [Bank]’s consent and to file all documents to reflect Buyer’s ownership with encumbrance.”

Risk allocation & use before approval (if any temporary use is allowed)

“Pending bank approval, any limited use of the Vehicle by Buyer is as bailee only; risk of loss and all liabilities remain with Seller. Buyer shall not transfer, encumber, or conceal the Vehicle, and shall return it immediately upon demand.”

Refund mechanic if bank disapproves

“If [Bank] disapproves Buyer’s assumption application within 30 calendar days, Seller shall return all payments received less actual, receipted processing costs of ₱____ within five (5) banking days from notice.”

Always tailor clauses to the bank’s required forms; bank templates usually prevail.

11) Special situations

Corporate seller or buyer. Require board/partner resolutions and proof of authority.
Deceased seller. Work through the estate (heirs/administrator) and bank; extra probate/SPA steps.
Past-due or repossession stage. Banks rarely allow assumptions; expect take-out with larger down and fees, or auction.
Cross-bank take-out. Time the LTO and registry filings so the release of encumbrance and new mortgage annotation dovetail—avoid gaps where the car appears “clean” without security.

12) Clean, compliant checklist (one-page)

Seller

Bank policy & eligibility confirmed in writing
Buyer pre-qualified by bank
Draft DOS with condition precedent + disclosures
Bank consent + novation/assumption signed
Insurance endorsements issued
LTO change of ownership filed/receipts kept
Turnover protocol (keys, docs, inventory photos)

Buyer

Verify CR/OR, VIN/engine, encumbrance, SOA/payoff
Bank loan approved; terms accepted
DOS and bank papers notarized and complete
Insurance re-endorsed (you as insured, bank as loss payee)
LTO filing done; keep certified copies
Maintain payments exclusively through bank channels

13) Bottom line

A car loan “assumption” in the Philippines is safe only if the bank consents and participates in the documentation and registrations. Anything less leaves the seller legally on the hook and the buyer exposed to repossession and possible criminal issues stemming from unauthorized transfer of a mortgaged vehicle. Build the deal around bank approval, proper deeds, mortgage annotations, insurance endorsements, and LTO filings—in that order.