Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Aug 3, 2021

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We all have that family member or friend who threatens to run up a bunch of debt right before they die having the time of their lives. While this may seem great in theory, the debt doesn’t just go away. 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. The debt can also be passed along to family members who are left behind. 

Personal loans are often used for short-term purchases or for unexpected personal expenses. Sometimes, they’re also used for debt consolidation. 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.

How Do Personal Loan Affect Family Members after Death?

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 fully 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 they 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.

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How Does This Affect Mortgage Debt?

With reverse mortgages becoming more common among elderly borrowers, this part of the process has become more complicated. Many times, loan officers will try to educate family members as well when selling a reverse mortgage loan. Once they die, the estate will need to pay back any and all payments the deceased received as part of the loan. This typically means selling off the property or getting a new mortgage if family members really want to keep the property. Many people also don’t realize initially that this could activate when one spouse dies, even if both were on title.

This happens when a regular mortgage lender is involved or when the house is completely paid off. If the deceased wills the house, there may be estate taxes. If there’s no co-borrower on the monthly mortgage payments, anybody taking over would need to apply for a new mortgage loan. Generally, mortgage loans are not assumable.

If you own your home outright as the sole owner, the easiest way to get around this is by having a secondary person on title. For elderly parents, this might be a child who plans to take care of them or take over the house at a later time. Adult children can also be on mortgages to take over mortgage payments as needed.

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If you’re looking for a loan of any type, your search will likely begin online. You can submit an application and review your options for monthly payment, loan balance, and more. If you’re interested in a reverse mortgage loan, you can also compare different lenders and find terms that make sense for you. Just enter your ZIP code below to view lenders with cheap loan rates.