What happens to loans when a borrower dies?
Many families who have lost their breadwinner do not know what happens to the deceased’s loans or credit card. The last thing they think about would be engaging with debt collectors. The steps that financial institutions will take to collect contributions vary depending on the category of the loan. In some cases, like a home loan, lenders have regulations to help them recover. In others, such as a personal loan, there is no legal recourse for a lender.
A lot depends on the collateral and whether there is a guarantor, co-applicant or co-borrower in the loan. Let’s take a look at the steps a lender could take to collect a loan.
Mortgage loan: As mortgage loans are long-term products, lenders structure them in such a way that their recovery is not affected in the event of the death of the borrowers. Lenders ensure that there is a co-applicant for a loan. Many only sanction the loan if the borrower has an adequate life insurance policy.
If one of the co-borrowers dies, the responsibility to repay the loan falls on the other. The living co-borrower will have to continue to repay the loan.
âThe co-borrower must notify the lender of the death of the other borrower. The lender will remove the deceased from the loan. If the repayment was linked to the deceased’s bank account, the lender will change it. The living co-borrower will have to start repaying from their bank account, âsaid Gaurav Pawra, CEO of Clix Housing Finance.
If the borrower had purchased a group life insurance policy with the lender, the lender would go to the insurance company for a claim. The lender will reduce the loan based on the insurance payment. The co-borrower will continue to pay the remaining amount.
If the amount of the claim is greater than the outstanding loan, the insurer will pay the additional money to the nominee. If a borrower had individual life insurance, the nominee could claim it and settle the loan.
If there are no co-borrowers, the lender will first resort to the life insurance option. If the insurance claim is not sufficient to pay off the entire loan, the lender will offer alternatives to the legal heirs.
The first option for the family is to repay the loan by arranging the money. If the legal heir, for example the son of the deceased, is willing to pay the EMI, the lender will add him as a co-applicant after checking his creditworthiness.
If neither the family (legal heirs) can repay the outstanding amount nor the legal heirs can be added to the loan, the lender can take possession of the house under the Sarfaesi law. He can then sell the property at auction to recover his rights.
No lender allows another person to pay EMI on behalf of borrower due to KYC regulations and money laundering.
Personal loan / credit card: Personal loans and credit cards are not guaranteed. If a borrower or card user dies, the lender will write them off. âThere is no provision to hold the legal heir responsible for the repayment of a loan,â said Satyam Kumar, CEO and co-founder of LoanTap.
According to Kumar, most lenders and card issuers today ensure that there is an insurance policy for personal loans. When the borrower dies, lenders would file a claim with their partner insurer.
âIn some cases, the family might be willing to repay the personal loan out of love and affection for the deceased. The lender could waive fees, penalties (if any) and would even be prepared to have their hair cut if necessary, âsaid Adheer Dhar, a banker who worked with Citi.
Vehicle loan: When a borrower takes out a loan for a car or a two-wheeler, the vehicle is mortgaged with the lender. When the borrower dies, the lender will approach the family to settle the loan. “In case the family is unable to repay, the lender can take possession of the vehicle, which they will auction to collect the contributions,” Kumar said.
According to him, in rare circumstances, if the legal heir is willing to repay the EMI, the financial institution can reserve a new loan in his name and ask the family member to take possession of the vehicle by way of transfer.
Education loan: Most lenders do not provide a student loan without a guarantor. If the loan amount is more than a specific limit, the parents of students must also offer collateral. If the borrower dies, the bank will contact the guarantor (usually the parents) to repay. The financial institution can also auction off the real estate offered as collateral if the guarantor is unable to repay the loan.
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