Summary of this article
Whether a loan needs to be paid after the death of the borrower or not depends on many factors like the type of loan, presence of a co-borrower or guarantor, loan against asset or term insurance cover, among others.
When the primary borrower of a home loan dies, the bank will ask the co-borrower (if any) to repay the outstanding amount.
As there is no collateral security offered to the lender in unsecured loans like a personal loan or a credit card loan, the lender cannot recover the outstanding amount from the borrower’s family member or the legal heir if the borrower dies during the loan tenure.
A loan is considered a long-term commitment for most Indian families. Loans are taken for everyone’s favourite goals: A house they live in, a car they drive, or even to fulfil their personal needs.
However, unexpected situations happen sometimes, and borrowers don’t always get the chance to repay their loan amount before their death. Family members often stress about the loan while dealing with the loss of their loved one. They often have many questions, like: Will we need to repay the loan? Can the bank seize the property? What are our rights as a legal heir?
Things are not that simple, nor easy. Whether a loan needs to be paid after the death of the borrower or not depends on many factors, like the type of loan, the presence of a co-borrower or guarantor, loan against asset or term insurance cover, among others. Here are some rules that clarify who needs to pay when a borrower dies.
Who Is Responsible For Clearing A Housing Loan After The Borrower's Death?
When the primary borrower of a home loan dies, the bank will ask the co-borrower (if any) to repay the outstanding amount. If no co-borrower exists for the loan or the co-borrower is unable to service the home loan, the bank will ask either the guarantor or the legal heir to repay the outstanding loan amount. If the borrower has opted for a home loan insurance cover, the claim amount will be given to the lender to adjust the outstanding amount directly.
If the borrower had opted for only term insurance, the claim amount would be credited to the nominee’s account and would be handed over to the legal heir after the due procedure. In this case, the legal heir has every right to use that claim amount towards the term insurance to repay the deceased’s home loan and other liabilities.
If no home loan insurance is in place, then the bank cannot recover the outstanding amount from the co-borrower, legal heir or guarantor. But yes, they have every right to seize the property from them and liquidate the property to recover their money.
Who Is Responsible For Clearing A Car Loan After The Borrower's Death?
If you had taken a loan to purchase your dream car and suddenly die during the loan tenure, the bank will contact your family members to recover the outstanding amount. However, if your legal heir wants to own the car, then they will have to repay the entire outstanding amount to the bank. If your legal heir doesn’t want to repay the loan or any family member refuses to repay the outstanding loan amount, the bank will seize your car and auction it off to recover its dues.
Repayment Liability In Case Of Personal Loan and Credit Card Loans
As there is no collateral security offered to the lender in unsecured loans like a personal loan or a credit card loan, the lender cannot recover the outstanding amount from the borrower’s family member or the legal heir if the borrower dies during the loan tenure. Only if there is a co-borrower for the loan can the bank take action against them to recover its money. But if there is no co-borrower for the loan and the bank has no other way to recover the outstanding amount, they will be left with no other choice except to mark that loan as NPA.
Understanding Your Rights and Liabilities When Inherited Assets Carry Outstanding Loans
If your bank sends a legal notice to you asking to repay your deceased borrower’s outstanding loan amount, you need to analyse the financial situation first. A legal heir is only liable to repay the outstanding loan amount up to the total value of properties/ assets they received from the deceased borrower. So, if a legal heir receives the property from the deceased borrower, they must first calculate whether they received assets worth more than the total amount they need to repay towards the loan or received assets worth less. If they are worth more, you can think of repaying the loan. Otherwise, you can give the property back to the lender and let them liquidate the property to recover their money.
There is a higher risk involved with unsecured loans. That’s why they attract a higher interest rate. Adding a co-borrower can lower the interest rate on your unsecured loans, as it lowers the bank’s recovery risk significantly.
Having a good loan insurance cover can benefit both the borrower and the lender. The lender can easily recover the outstanding loan amount from the insurance company. Meanwhile, the legal heir gets a free hand on the property they received from the borrower.
FAQs
1. Does the legal heir need to repay a deceased borrower’ loan from their own funds?
No. The legal heir will only be responsible to repay the deceased borrower’s loan to the extent of the assets or property that they inherited from him. He does not have to pay off the loan amounts from his own personal funds.
2. Does home loan need to be repaid if the borrower dies?
If there was a co borrower associated with the loan, then he will have to take over the loan repayment responsibility. In case there is home loan insurance in place, the insurer will pay off the outstanding amount. If not, the bank has the right to recover its dues from the property that was mortgaged.
3. Can a bank recover dues from family members if a borrower defaults on repayment of personal loan/ credit card debt?
Family members are typically not responsible to repay any personal loans or credit card debts if the borrower passes away. These loans are unsecured, which means that the bank cannot force the legal heirs to repay the loan amount from their personal assets unless they were a co borrower or had agreed to act as guarantor for the loan.
