Do legal heirs have to pay if the borrower dies with an outstanding loan?
Getting a loan is a lot easier these days than it used to be. You have a monthly income stream, a great credit history and profile, and there you go, your bank pays off the loan. But how is your loan treated or are your legal heirs obligated to pay the loan in case you die prematurely and a loan is outstanding? Here’s what we’re going to discuss and the different aspects to it.
Case 1: When the loan has a co-applicant
If the financing has been secured in the joint name, the obligation to service the debt is transferred to the co-borrowers on the eve of the death of one of the borrowers. Therefore, in such a case, the main applicant’s liability to pay off the debt is transferred to the other co-borrowers.
In the event that a Borrower takes out a loan with another co-applicant, the lead applicant’s obligation to repay the loan passes to the surviving co-applicant or joint debtor.
Case 2: If the loan account was kept individually
In such a case, the treatment of the loan/debt will be decided taking into account the nature of the loan, ie whether it is an unsecured or secured debt.
Unsecured Loan: With unsecured loans, banks or other financial institutions cannot coerce or compel the legal heirs to pay off the debt in the event of the debtor’s death. This is because there is no collateral for the loan received. All in all, if the borrower has died without repaying the unsecured loan in full, the same cannot be reclaimed by his spouse or legal heirs.
Secured Loan: In this case, the financial institution already has the collateral for the secured loan. Here, the legal heirs can decide whether or not to repay the outstanding fees, depending on the assets held as security at the bank. Therefore, although the creditor may require the borrower’s legal heirs to repay the loan, they cannot be compelled to make the payment.
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Story first published: Tuesday, August 16, 2022 at 10:45 p.m [IST]