What happens to a loan if the borrower dies?

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The sudden demise of a primary earning member can unsettle the family in more ways than one. From emotional turmoil to making ends meet, challenges can be many for the grief-stricken family. One of the biggest points of worries could be outstanding loans in the name of the demised member. With no regular income insight these loans can be a huge burden on the family. Here is a low-down on what happens to outstanding loans in case of the sudden demise of a borrower.

Home Loans

Home loans are generally issued for the tenure of 15-20 years. Being a long term contract banks are generally prepared for any untoward event. For instance, most of the time banks may ask for a co-borrower, who takes the responsibility of repaying the loan after the death of the borrower. But, in case there is no co-borrower and the sole borrower also dies, here’s what happens:

“If the co-borrower also dies, then the lender will try to establish the legal heir of the borrower. The lender will transfer the loan to the legal heir only after evaluating his repayment capacity and other facets of his credit profile. Lenders may also allow the legal heir to sell the property and close the loan from the proceeds realised from the property sale. If this too does not materialise, then the lender, as a last resort, will auction the property to recover the outstanding loan amount,” said Ratan Chaudhary – Head of Home Loans, Paisabazaar.com,

Apart from having co-borrowers, banks also sell term insurance plan to the borrower at the time of taking the home loan so that the loan remains covered throughout the tenure of the policy. “Check with your lender about the home loan insurance which is a single payment policy and is taken at the time of taking a loan. This amount can be used by the nominee to repay the outstanding debt,” Kshitiz Mahajan, co-founder of Complete Circle Consultant told Money9.

“If the borrower had bought a home loan insurance plan covering the outstanding loan amount, then the insurer would settle the outstanding loan amount with the bank. The insurers usually allow the insurance claim on the death of the primary borrower. Some insurers also offer home loan insurance plans covering the sanctioned loan amount till the end of the loan tenure. In such cases, the insurer pays the excess money, if any, left after settling the outstanding loan amount to the nominee in the insurance plan,” added Chaudhary.

Personal Loans

While home loans are secured loans as they have collateral, personal loans and a credit card are considered unsecured loan. In such type of loans, a lender cannot ask the legal heirs for the repayment of a loan. If the borrower dies then they have to write off the loan.

Vehicle Loans

Being a secured loan, the vehicle against which the loan is taken is mortgaged by the lender. As a first step lender asks the family to repay the loan but if the financial condition is not so good to repay the loan then the lender can take possession of the vehicle to recover the dues.