What is the Right of Rescission?

The right of rescission is the ability of a customer to cancel a contractual agreement without incurring any type of penalty or paying any sort of fee for the cancellation. In most cases, this right remains in effect for a total of three business days after the contract is signed. This type of consumer right is often established in federal laws that govern the interaction between consumers and businesses that provide goods and services.

One of the most common applications of the right of rescission has to do with situations in which borrowers seek loans from lenders. Depending on the type of loan involved, the borrower has three business days from the date that the loan agreement is signed to decide that he or she does not wish to move forward with the agreement, and cancel the transaction. In the event that the borrower has already received funds from the loan contract, those funds must be returned within that three-day period, or the loan will stand.

A right of rescission is designed to protect the best interests of the consumer. By creating this window of opportunity for the borrower to investigate the circumstances of the loan in more detail, the chances of being talked into a loan that is not necessary are greatly minimized. The right can also aid consumers when they determine that the item they wished to purchase is not needed after all.

For example, if a consumer uses a line of credit to buy a vehicle, then decides within three business days that the vehicle is not needed or desired, it can be returned to the dealer and the payment stopped, without incurring any type of penalties. At the same time, the three day window also prevents unscrupulous lenders from taking advantage of consumers who may lack the knowledge to make an informed decision about a given loan package. The window provides the uninformed borrower with more time to investigate the terms of the loan and decide if it as equitable as the lender claims..

It is important to note that not all loans automatically provide the right of rescission. Depending on how applicable laws and regulations in the country of origin are written, some types of mortgages are excluded from this arrangement. In some countries, there are also some limits of how this right applies to lines of credit and other lending services. An example would be the closing costs associated with the purchase of a home, where the terms of the contract did not allow for a reimbursement of those costs in the event the borrower chose to cancel a home-equity loan within three business days of signing the contract. For this reason, it is always a good idea to read the loan agreement thoroughly, and determine if the right of rescission applies, and what types of limitations may be involved with the specific lending agreement.