What happens to a personal loan if the borrower dies?
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UPDATED: Dec 9, 2020
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When a borrower dies, a personal loan remains open and still needs to be paid. Although the loan is no longer tied to the credit of the deceased borrower, further actions such as property repossession or charging the person’s estate can occur.
Personal loans are used for short-term purchases or for unexpected personal expenses. The loans can be made from a financial institution, or they can be made between family members or friends.
The loans come in two formats: secured and unsecured. If the borrower dies, the outcome is impacted by the type of personal loan.
If the loan is secured, and tied to a form of collateral such as a car, the collateral will be repossessed by the lender to pay for the loan.
If the loan is unsecured, more steps need to be taken to pay the loan off.
Unsecured personal loans can cause issues for family members for two reasons. The first problem arises if the loan was processed with a co-signer. A co-signer enables a borrower to achieve a better interest rate and/or more money. But it also links an additional person to a lending agreement. If there was a co-signer on the loan, then the co-signer will be responsible for the balance of the amount still owed. Collection agencies can target a co-signer with as much fervor as the main borrower. It is important for a co-signer to remain updated on any loans he or she signed.
The second problem occurs if the loan is unsecured without a co-signer. If there is no direct financial backer or collateral to collect for the loan, then the deceased borrower’s estate becomes the payer. When a borrower dies, their debts and personal obligations die with them, but the responsibility is transferred to their estate. A lender can sue or place a lien on the estate of the decreased for the amount owed on the loan. If this occurs, the personal loan will be paid off from a bank account, or from selling larger remaining possessions such as a house, car, or valuable items.
If the surviving family members want to hold onto all of the deceased borrower’s possession, they should take over the loan payments themselves. The family members should contact all lenders for an update of the amount owed; read frequently asked questions about the industry, and then decide how to handle the financial obligations of the deceased borrower.