What differentiates a loan assumption from a loan novation?

The distinction between loan assumption and loan novation lies in the nature of how obligations are managed between the original borrower and the new borrower. When a loan assumption occurs, the new borrower takes over the responsibilities of the loan from the original borrower, but the original borrower typically remains liable for the loan as well. This means the lender still holds the original borrower's obligations intact, even while allowing the new borrower to make payments on the loan.

On the other hand, in a loan novation, the original loan agreement is essentially terminated, and a new contract is created with the new borrower. This process effectively releases the original borrower from all obligations related to the loan, making it a clean break between the lender and the original borrower. Therefore, novation not only transfers the obligations to the new party but also adds a layer of assurance for the lender that they are dealing solely with the new borrower moving forward.

In this context, the answer correctly identifies that loan assumption involves transferring loan obligations to another party, but does not relieve the original borrower of their responsibilities, which is a critical aspect of understanding how loan assumptions function compared to novation.