A borrower must repay the entire loan to the lender within the scheduled repayment tenure. If he fails, the lender can take legal action to recover the outstanding amount. However, what happens when the borrower dies during the loan tenure? Who is liable to pay the outstanding loan then? It depends on the type of loan and collateral. Let’s find out how the liability to pay back shifts according to the loan types with the demise of a borrower.
Repaying the home loan
If the primary borrower dies, the bank first checks for a co-borrower who could repay the outstanding amount. In the absence of a co-borrower or if the co-borrower cannot service the outstanding loan, the bank can approach the guarantor or the legal heir. Suppose the deceased borrower had taken a home loan insurance cover. In that case, the claim amount is paid directly to the lender to adjust the outstanding loan.
Suppose the borrower had taken only term insurance. In that case, the claim amount is credited to the nominee’s account and awarded to the legal heir after the due legal procedure. The legal heir has the right to use the term insurance claim amount to repay the deceased’s home loan and other liabilities. If there is no home loan insurance, the bank cannot recover the outstanding amount from the co-borrower, legal heir or guarantor. It can seize the property and liquidate it to recover the money.
Repaying the car loan
If the borrower dies during the loan period, the bank contacts the borrower’s family to recover the outstanding amount. If there is a legal heir who wants to possess the car, then he/she has to repay the outstanding amount to the bank. If the legal heir refuses to repay the outstanding loan amount, the bank seizes the car and auctions it to recover its dues.
Repayment liability for personal, credit card loans
Unlike secured loans, in unsecured loans such as personal or credit card loans, no collateral is pledged to the lender. If the borrower dies during the loan period, the lender can’t recover the outstanding amount from the legal heir or the borrower’s family member. If a co-borrower is available for the loan, the bank can initiate a procedure to recover the money. However, in the absence of a co-borrower and with no other option for recovery of the outstanding loan amount, the lender is left with the only option to mark such a loan as an NPA.
What should a legal heir do?
If the bank approaches the legal heir with a notice asking to repay the outstanding loan amount of the deceased borrower, the heir should evaluate the financial outcome. A legal heir can be made liable to repay the outstanding loan amount maximum up to the value of the total assets received from the deceased borrower. In such a case, the legal heir should first assess if the value of properties/assets received is higher than the total repayment obligation towards the outstanding loan amount. If the value is higher, it can be a good idea to repay the outstanding loan. Else, he may hand over the property to the lender and let them recover their money by liquidating it.
Adhil Shetty, CEO, Bankbazaar.com, explains, “Higher risks associated with unsecured loans make them carry a higher interest rate. In many cases, adding a co-borrower can reduce the interest rate on unsecured loans because it reduces the bank’s recovery risk to a great extent.”
Having an adequate loan insurance cover can be a win-win situation for the borrower and the lender. The lender can recover the outstanding loan from the insurance company, and the legal heir can enjoy a free right over the property they receive from the deceased borrower.
The home loan insurance helps family members repay the loan without facing financial hardship when the borrower dies. However, the borrower must also create certain financial assets to ensure his debts are paid off in case of his untimely demise.
Dues of the dead
— The legal heir can use the term insurance claim amount to repay the deceased’s home loan and other liabilities;
— For unsecured loans like personal or credit card loans, lenders can’t recover the outstanding amount from the legal heir;
— The legal heir should first assess if the value of assets of the deceased is higher than the total repayment obligation.