Taking out loans is common these days. Some take out home loans to buy a house, others take out auto loans for a car, and others take out personal loans for their needs. But imagine what happens if the borrower dies unexpectedly? Does the family have to repay the remaining loan, or does the bank forgive it? Learn about the rules for different loans and who bears the responsibility.
Personal Loan: The loan ends after death
A personal loan is called an unsecured loan because it requires no collateral or property collateral. If the borrower dies, the bank cannot recover the money from the family. The loan is based solely on the borrower’s income, so upon their death, the loan is extinguished. The bank places the loan in its “non-recoverable” account. (Also read – Personal Loan Mistakes: A Debt Trap Can Make You Bankrupt! If you make these 5 mistakes, even by mistake, while taking out a loan .)
Credit card balance does not go to the family
Any spending on a credit card is treated like a loan. However, if the cardholder dies, the bank or card company cannot burden the family with the outstanding balance. In most cases, the bank will consider the amount a “bad debt” and close it in its records. The family is relieved of this debt.
Home Loan: Recovery from co-applicant
A home loan is a secured loan. The home or property documents are pledged to the bank in exchange for the loan. If the borrower dies, the co-applicant or legal heir is responsible for repaying the outstanding amount. If the family is unable to repay the loan, the bank can auction the property and recover the funds. (Also read: The burden of multiple loans at once! Tired of paying EMIs? This smart method will end all your stress in an instant .)
Insurance can become a protective shield
Nowadays, most banks offer home loan insurance coverage to prevent such situations. If the borrower has taken out home loan insurance, the insurance company pays the loan balance after their death, and the home remains safe with the family.
Car Loan: Bank seizes the vehicle
A car loan is also a secured loan, in which the bank holds the car itself as collateral. If the borrower dies and the family is unable to repay the installments, the bank seizes the car. Later, it is sold to recover the outstanding loan amount. This way, the bank recoups its losses. (Also read – If your CIBIL score is always 750+, banks will readily agree to grant a loan! Just never forget these 5 golden rules .)
Is it necessary to take insurance for home loan?
Not required but recommended. This allows the insurance company to repay the loan in the event of the borrower’s death.
Does the bank give notice to the family before seizing the car?
Yes, the bank first sends a notice. Only if the family defaults on the loan does the bank seize the car or property.
