It raises a number of questions regarding who repays the loan when the personal loan borrower dies. From who bears the responsibility to what happens with the loan itself, knowing what happens to a personal loan after death helps you plan financial protection and avoid burdening family members.
Depending on the type of loan a borrower leaves behind, the liability of a personal loan can be transferred to another individual or be claimed through property. In this blog, we will understand what happens to personal loans when the borrower dies.
The one question that borrowers often ask is, ‘What happens to personal loans after the death of the borrower? The answer, however, lies in the terms and conditions of the loan agreement. Banks or Non-Banking Financial Companies (NBFCs) will attempt to recover the outstanding amount. Here is what happens to a personal loan after death:
Personal loans are unsecured, which means the borrower does not pledge any collateral, asset or security in any form to get a personal loan. In this situation, family members or legal heirs are not liable to repay the loan personally.
Co-borrowers and guarantors allow individuals to qualify for a personal loan and share responsibility to repay the loan when the principal borrower fails. Co-borrowers repay the loan from the start, whereas guarantors are liable to repay the loan only when the principal borrowers fail to repay the loan.
In case the borrower opted for personal loan protection insurance or life insurance, the insurance company will repay the outstanding loan balance to the lender (Bank or NBFC). This helps you protect your family from being in debt.
A small number of personal loans in India are secured. It means the borrower has pledged a secured property, gold or any other asset. In this situation, the lender recovers the loan through the estate of the deceased (savings, fixed deposits, property or any other assets). The debt has to be paid by executors or legal heirs, and then the estate is to be divided.
If there are no assets, the lender records a loss after due recovery steps. If the borrower had left behind no assets, and the bank has no guarantor or co-applicant, the bank or NBFC writes off the loan as a loss.
If the borrower had a guarantor or co-applicant, the responsibility of repaying the loan passes to them when the personal loan borrower dies.
This is why guarantors and co-applicants always need to understand their legal and financial obligations before they sign loan documents.
No, the lender can’t take possession of property belonging to the heirs or family unless it was also a part of the borrower’s assets or was jointly held. For instance:
It is always painful to lose a loved one, and managing their finances at that time can be very disturbing. However, here are some simple steps families can follow to facilitate the process:
Even though loan insurance is not mandatory, it’s a smart and recommended choice for people who are availing a personal loan. It insures the family of the borrower against financial loss. All you have to do is pay a small one-time payment to ensure that you or your family does not have to bear the burden of repaying a loan.
If you’re taking a personal loan or already have taken one out, you should know what happens to a personal loan after death. It not only helps you protect your family against any financial burden but also plan financial protection.
While long-term financial planning is always important, so are short-term obligations. At DMI Finance, we help you budget your finances with confidence by offering personal loans. Apply for a personal loan with DMI Finance now to get your financial future in control.
1. Can the lender use the deceased borrower’s savings to recover the loan?
Yes, the lender can recover personal loan dues from the borrower’s accounts before releasing the excess funds.
2. What if both the borrower and guarantor die together?
If it is a secured loan, the bank or NBFCs can recover dues from the estate or write off the loan.
3. Are legal heirs liable to repay the loan?
No. If the personal loan is unsecured, legal heirs are not liable to repay the personal loan. The lender bears the loss if there are no legal ways to recover the loan.
4. Does every personal loan include insurance?
No, personal loan insurance is optional, but important, as it helps you protect your family from the stress of repaying the loan.
5. Can the lender sue the borrower’s family after death?
No, lenders cannot sue the borrower’s family after the borrower’s death to recover the personal loan. Lenders must bear the loss if they’re not co-applicants, guarantors, or inherit assets.
6. What if the borrower dies before the first EMI?
Since the loan is already disbursed, the loan stays active and must be cleared by the estate or insurer.
7. Does a co-applicant always bear responsibility?
Yes. A co-borrower has a contractual obligation to pay back debts and continue making EMIs. If necessary, ask for a short moratorium and agree on a payback schedule.
8. Is it possible for the lender to deduct EMIs from a joint account after death?
Debits may continue until the lender is informed if there is a standing instruction and the account is still open.
9. What happens if a borrower passes away without leaving a will?
The loan administrator uses the borrower’s assets in the event that the borrower passes away without leaving a valid will.
10. Can the family repay voluntarily?
Even if the deceased had no insurance or co-borrowers, the family can choose to repay the outstanding loan to prevent the debt from affecting the estate’s settlement.
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