Paying for medical and other types of emergencies is one of the most common reasons to take a personal loan. It’s hard to predict the outcomes of such emergencies because, in some cases, even the best care isn’t sufficient to prevent death. But what happens to a personal loan if the borrower dies?
Lenders don’t usually forgive debts after a borrower passes away. They collect them either from the borrower’s estate or loan co-applicants.
You must know how personal loans work to understand what happens to the outstanding loan balance after your or your loved one’s death.
In this article, we’ll tell you what happens to a personal loan if the borrower dies and show you how to avoid putting a financial burden on your family in the event of your death.
Table of Contents
The Basics of Personal Loans
Online lenders, banks, and credit unions offer personal loans to anyone who meets the minimum eligibility criteria.
FICO credit score, monthly income, and years of working experience are among the criteria you’ll have to meet to qualify for a personal loan.
The maximum amount you can borrow (usually around $50,000), the duration of the loan, and interest rates depend on your financial history and credit score.
A bad credit score doesn’t automatically disqualify you from obtaining a personal loan because some lenders approve applications even if the applicant’s credit score is in the low-500s.
Personal loans usually have fixed interest rates, but keep in mind that some lenders offer variable-rate personal loans. In addition, personal loans include processing fees and origination fees that reduce the amount that reaches the borrower’s bank account.
Interest rates depend on the loan type and lender, varying from 4% to over 30%.
Most personal loans have 1 to 10-year repayment periods. However, personal loans with long repayment periods usually have higher interest rates.
Unsecured Personal Loans
Most personal loans fall into this category. Lenders don’t require collateral for unsecured personal loans, which means you don’t need cash, personal property, or other assets to qualify for this type of loan.
The terms of an unsecured personal loan prevent lenders from seizing the borrower’s assets after their death. Still, this doesn’t mean the lender will automatically write off the debt if the borrower dies.
Secured Personal Loans
Some lenders require collateral such as cash, a car, or property to approve a personal loan. These assets serve as securities that guarantee the borrower will repay the loan.
The lender has the right to seize them if a borrower falls behind on monthly payments, defaults on a loan, or is unable to repay the debt for some other reason.
Loan Repayment in The Event of The Borrower’s Death
What happens to a personal loan after the borrower dies depends on the terms of the loan. In most cases, the debt will be paid from the deceased’s assets. A lender might also use the collateral to collect the remaining credit balance.
Let’s look at some of the most likely personal loan repayment scenarios in the event of the borrower’s death.
Secured And Unsecured Debts
Some personal loans require a guarantor who assumes the responsibility of paying the debt back if a borrower dies or defaults on a loan.
In this case, the lender will collect the debt from the guarantor after the borrower’s death. However, if the personal loan doesn’t include a guarantor, the lender can collect the debt from the borrower’s assets.
Legal heirs or the will executors don’t have to pay the borrower’s debt from their own money. Instead, they can use the loan holder’s assets to settle the debt after covering funeral and estate administration costs.
However, the loan is written off if the value of the deceased’s assets is insufficient to repay the loan.
Lenders can claim the collateral after the loan holder dies. The borrower’s spouse can inform the lender that their partner has passed away and resume making payments in their spouse’s name.
Still, a lender cannot force a surviving spouse to repay their partner’s debt, and they must follow legal procedures to claim the collateral associated with the loan.
Joined Debts
Both borrowers are equally responsible for repaying a joint personal loan, so if the primary borrower dies, the co-borrower must settle the remaining debt even though they don’t have ownership rights over the loan.
For instance, if a married couple takes a joint personal loan, and the spouse who was the primary borrower dies during the loan term, the surviving spouse must repay the rest of the loan.
The Advantages of Loan Insurance Policies
Personal loan protection insurance can remove the financial burden of paying back the debt from the deceased’s legal heirs or will executors.
The financial product ensures that the insurance company pays the remaining debt if the borrower loses their job or dies unexpectedly. The insurance coverage usually lasts 12 to 24 months, and the policy only pays for debts up to a previously set amount.
Personal loan protection insurance is available to borrowers aged 18 to 65, while its costs vary depending on the borrower’s place of residence and several other factors.
It’s important to note that personal loan insurance can be pricey, which makes it less than ideal for borrowers with low credit scores or monthly income.
Lenders often offer loan insurance as an add-on to a personal loan allowing borrowers to decide if they need protection against unforeseen circumstances.
Paying Back a Personal Loan After The Borrower’s Death
Losing a loved one is never easy, but despite the grief, you’ll have to take steps to repay their loan debts. Lenders may take legal action and even take the case to a civil court if you don’t resume payments or settle a debt in another way.
Here’s what you’ll need to do to repay a personal loan after the borrower’s death.
Inform The Lender That The Borrower Has Died
You’ll have thirty days to get in touch with the lender and inform them of the loan holder’s death. In most cases, you’ll have to send the death certificate to the bank or an online lender so that they stop expecting payments from the deceased’s account.
Learn More About The Loan
Don’t hesitate to request information about the personal loan from the lender and ask them to disclose the full debt amount. Optionally, you can work out a way to make payments from your bank account instead of using the borrower’s account.
The lender won’t try to collect the assets you inherited and will instead give you time to sell them or find another way to repay the debt if they’re informed about the borrower’s death in time.
You should check if they already claimed the collateral or tried to collect the debt from the deceased’s estate. Don’t forget that you may not have to pay the debt if the borrower had personal loan protection insurance.
Decide How You Want to Repay the Debt
Lenders cannot collect the remaining debts after a borrower dies before the funeral and administration costs are paid. Also, legal heirs don’t have to repay the debt with their own money if the deceased didn’t leave any assets behind.
Afterward, you can decide if you want to pay the debt in full or work out a payment plan with the lender.
Frequently Asked Questions
You’ll only inherit the remaining assets after the funeral costs, administrative fees, and loan debt are deducted from the deceased’s estate. Hence, any outstanding balance on a personal loan can affect your inheritance.
Negotiating lower monthly payments or taking another loan to consolidate debt is among the things you can do if you inherit a debt you can’t repay.
Lenders must write off a debt if the borrower dies before repaying a personal loan and doesn’t leave sufficient assets to cover the outstanding loan balance.
A lender has three to six months after a borrower dies to make a claim against their estate and collect an outstanding debt.
The Financial Strain of Personal Loan Repayment After Death
You cannot inherit a personal loan debt after a family member dies unless you’re the loan’s guarantor or co-borrower. All individual debts are paid from the borrower’s estate or written off if the deceased doesn’t leave any assets behind.
You’d inherit your spouse’s debt if you applied for a joint personal loan prior to their death, even if you’re not the primary borrower.
The financial strain untimely death can put on the borrower’s family largely depends on the loan type and the repayment terms.
Despite the steep price, getting personal loan protection insurance is arguably the best way to soften a loan’s potential financial blow and protect the borrower’s family inheritance.
Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
