Risks of “Pasalo” Car Loans Without Lender Consent in the Philippines

Executive summary

“Pasalo” (assume-balance or take-over-payment) arrangements are common in informal vehicle sales. When done without the lender’s written consent, they are legally risky for both the original borrower and the taker (“pasalo” buyer). Philippine law treats the lender’s consent as essential if a new person will assume the debt. Without it, the lender can still pursue the original borrower, declare default, and repossess the car. There is also potential criminal exposure for selling or transferring a mortgaged vehicle without the mortgagee’s consent, and serious registration, insurance, and financing complications.

This article explains the legal framework, practical dangers, and safer alternatives.

What “pasalo” means in practice

A typical “pasalo” deal looks like this:

The original borrower is still paying an auto loan secured by a chattel mortgage over the vehicle.
The borrower “sells” the vehicle to a buyer who takes over the monthly payments.
Registration (OR/CR) and loan documents usually remain under the borrower’s name because the lender has a lien; the buyer gets only a private deed or handwritten acknowledgment.
The lender is often not informed or explicitly does not consent.

This is not the same as a bank-approved assumption of mortgage or refinancing, where the lender qualifies and contracts with the new debtor.

The legal framework (Philippine context)

1) Novation and assumption of debt (Civil Code)

To substitute a new debtor (the “pasalo” buyer) in place of the old debtor (the original borrower), Philippine law requires creditor (lender) consent.
Without the lender’s consent, there is no effective substitution, and the original borrower remains fully liable. Any private deed between the borrower and buyer binds only between them, not the lender.

Practical effect: even if the buyer pays for months, the lender can still treat the original borrower as the sole debtor; missed or late payments may trigger default and repossession.

2) Chattel mortgage and criminal liability

Most auto loans are secured by a chattel mortgage over the vehicle.
Selling, transferring, or encumbering mortgaged personal property without the mortgagee’s consent can constitute a criminal offense under the Revised Penal Code (sale or pledge/removal of mortgaged property) and may also breach the Chattel Mortgage Law.
If the transfer is accompanied by deceit (e.g., misrepresentations to the lender or buyer), exposure to estafa (fraud) may arise.

Practical effect: the original borrower risks criminal complaints; the buyer may face seizure of the vehicle and possible involvement in criminal proceedings as possessor of the mortgaged asset.

3) Contractual default and acceleration

Standard loan contracts prohibit transfer or assignment without lender approval and contain acceleration clauses.
A prohibited transfer can be treated as default, allowing the lender to accelerate the entire loan, repossess the car, and charge fees/penalties.

4) LTO registration and ownership issues

The Certificate of Registration (CR) and Official Receipt (OR) remain in the original borrower’s name until the lender issues a release of chattel mortgage and documents for transfer.
The buyer typically cannot transfer registration, update records, or obtain certain permits/plate changes while the lien is active without the lender’s cooperation.

Practical effect: roadside checks, registration renewals, or accidents can expose the buyer’s lack of documentary control; disputes are common.

5) Insurance complications

Comprehensive insurance and TPL are often issued naming the registered owner and/or mortgagee. Policies usually require disclosure of any change in ownership or material interest.
Undeclared transfers can lead to claim denials, delayed payouts, or insurer subrogation complications.
If the buyer is not the named insured (or an authorized user), the insurer may contest coverage for losses.

6) Taxes and fees

Vehicles are personal property; there is no capital gains tax on the sale itself, but documentary and transfer fees arise upon proper transfer through LTO once the mortgage is released.
In “pasalo without consent,” formal transfer typically cannot be completed, so fees “saved” today often become larger costs (penalties, storage, legal fees) later.

Key risks by party

For the buyer (taker of the balance)

Repossession risk: the lender may repossess despite your payments to the seller.
No title/control: OR/CR remains in the seller’s name; you lack legal ownership evidence against third parties.
Insurance gaps: possible denial of claims for undeclared change of interest or policy violations.
No credit record benefit: payments rarely build your credit because the loan is not in your name.
Fraud exposure: if the vehicle is stolen, cloned, or previously encumbered to multiple parties, you have weak recourse.

For the original borrower (seller)

Continuing liability: you remain fully liable to the lender; your credit may be ruined by the buyer’s missed/late payments.
Criminal exposure: transferring a mortgaged vehicle without consent can be prosecuted.
Acceleration & fees: you may face demand letters, repossession, deficiency claims after auction, and litigation.
Insurance jeopardy: undisclosed change in custody/primary user can complicate claims.

For the lender

Collateral control risk: the vehicle changes hands without monitoring, increasing default and loss risk.
Enforcement costs: tracking, repossession, and litigation become harder when the possessor is not the registered debtor.

Common “pasalo without consent” scenarios (and what usually happens)

Buyer pays seller; seller fails to remit to lender
- Loan goes into default; lender repossesses from buyer; buyer must chase seller for refund (often futile).
Buyer pays directly to lender but without consent
- Lender may accept payments without recognizing the buyer as debtor; upon any breach, repossession proceeds; no rights to restructure, no formal amortization record for buyer.
Accident or total loss
- Insurer scrutinizes ownership/interest; claim delays or denial; proceeds—if any—go first to the mortgagee; buyer may be left uncompensated.
Police checkpoint or registration renewal
- Documents under seller’s name trigger questions; if encumbrance is active and the seller refuses cooperation, buyer is stuck.

Red flags and clauses to watch

Any ad that says “Take over payments, no bank approval needed”.
Seller refuses to show the loan contract, chattel mortgage, current statement, and valid IDs.
No written conformity of the lender; promises of “bank will be fine with it later.”
“Open deed” templates that try to bypass lender consent.
Insurance policy not updated to reflect primary user/authorized driver.

Safer, lawful alternatives

Assumption of mortgage with lender’s written consent (novation)
- The lender qualifies the buyer, issues written conformity, and amends/re-documents the loan to substitute the debtor.
- Registration and insurance can then be aligned properly.
Refinancing under the buyer’s name
- Buyer gets a new loan (possibly with another bank), proceeds are used to fully pay the old loan; lender issues release of chattel mortgage; clean transfer follows.
Full payment then ordinary sale
- Seller settles the loan, obtains release of chattel mortgage, and completes a regular sale with unencumbered OR/CR.
Lease-to-own with proper disclosures
- If a commercial arrangement is intended, use a lawful lease or rent-to-own contract, with lender’s consent and insurance/registration aligned.

Practical checklist (if you’re considering a “pasalo”)

Best practice: Do not proceed without lender consent. If you still evaluate, at minimum:

Request the lender’s written consent (bank letter or annotated contract). Verbal assurances are worthless.
Obtain and verify: latest statement of account, loan contract, chattel mortgage, OR/CR, seller’s IDs, and official receipts of payments.
Confirm no other liens or pending cases.
Align insurance: notify insurer, endorse the policy to reflect the correct insured, additional insured, loss payee, and principal driver; clarify coverage boundaries.
Use a formal deed (e.g., Deed of Sale with Assumption of Mortgage) co-signed by the lender if they approve; otherwise, don’t sign.
Avoid large cash transfers before lender issues written conformity or before full settlement and release of mortgage are executed.
Keep all communications in writing.

Frequently asked questions

Q: The seller says the bank allows “pasalo as long as payments are up to date.” True? A: Banks may tolerate third-party payments but that is not consent to substitute the debtor. You need express written approval for assumption/novation.

Q: If I keep paying on time, can the bank still repossess? A: Yes. A prohibited transfer breaches the loan; the lender can accelerate and repossess even if someone is paying unofficially.

Q: What if our deed says the buyer assumes all liabilities—does that protect the seller? A: It binds seller and buyer between themselves. It does not bind the lender without the lender’s consent. The seller remains liable to the lender.

Q: Is selling a mortgaged car without consent a crime? A: Yes, it can be. The law penalizes the sale/pledge/removal of mortgaged personal property without the mortgagee’s consent; other crimes (e.g., estafa) may apply if there’s deceit.

Q: Can the buyer transfer the OR/CR to their name? A: Generally no while the chattel mortgage is active unless the lender cooperates and issues a release or endorses an assumption.

Q: Are insurance claims valid in a “pasalo without consent”? A: Often problematic. Undeclared changes in interest/use can justify denial or reduction of claims. Insurers also pay the mortgagee first.

Bottom line

A “pasalo” car loan done without lender consent is a legal and financial minefield in the Philippines. The original borrower stays liable, the buyer lacks enforceable rights against the lender, and both sides risk repossession, criminal complaints, insurance problems, and costly disputes. The only safe path is to obtain the lender’s explicit written consent (novation/assumption), refinance, or fully settle before transferring.

This article provides general information, not legal advice. If you’re involved in or considering a “pasalo” arrangement, consult a Philippine lawyer and coordinate directly with the lender before taking any step.