When a borrower passes away, the process of managing his/her personal loan is itself a complex process both for their family member and lender. So, what really happens in that case? Let’s try to understand in a simple way!
A Personal Loan is a type of loan where you can borrow money without needing to provide any collateral, like property or assets. The amount you can borrow is decided based on your CIBIL Score, your income, and how much you can afford to pay back each month and others. Unlike some other loans that need you to put up something valuable as security, a Personal Loan lets you borrow money from a bank based on how reliable you are financially.
No Collateral Required: Personal loans do not require any collateral.
Flexible Usage: They can be used for multiple purposes such as medical emergencies, vacation, education or anything.
Fixed Tenure: Personal loans come with a fixed repayment period.
Interest Rates: The interest rates on personal loans are generally higher than secured loans. It’s starting from 10.50% p.a
Knowing what happens to a loan if the borrower dies is important for several reasons. When someone takes out a loan, they agree to repay it over time. If they pass away before paying it off, their family may become responsible for settling the debt (If the loan has a guarantor). This means the lender may look to the borrower's assets or insurance proceeds to cover what's owed. Understanding this helps families plan for how debts will be handled after a loved one's death, ensuring financial matters are managed properly during a difficult time.
Many lenders in personal loan offer protection insurance or personal loan insurance. If the borrower dies before repaying the loan, the outstanding amount usually needs to be settled (this means the money that still needs to be paid back to the lender). This can relieve the family members from the burden of repayment.
During applying for a personal loan many lenders want a guarantor or ao-applicant who needs to sign in the agreement. If the borrower died then the guarantor is responsible for paying the rest amount. If any collateral has been given to the bank then the bank has the right to seize the collateral and recover money.
Important note: If any co-borrower or guarantor is involved in the loan and If the loan remains unpaid, the co-borrower or guarantor’s credit score may suffer, impacting their future loan eligibility and financial standing.
If possible there will be a loan recovery from legal heirs but sometimes won’t happen. The lender accepts the rest of the amount as Non Performing Asset.
Inform the Lender: The first step is to inform the lender about the borrower’s death and provide a copy of the death certificate. This way the lender can try to recover the loan in various ways. If any way doesn’t work then they will classify the loan as a Non Performing Asset and they need to write-off.
Important note: If the borrower who died has money in their bank account the EMI will keep going.
Death certificate of the borrower, Proof of your authority to act on behalf of the borrower's estate, such as a letter of administration or executorship, Loan Agreement, Insurance Documents (If any), Legal Heir Certificate and Any specific forms or documents required by the lender, which can vary depending on their policies.
A legal heir certificate is an official document from the government that proves who the rightful inheritors are after someone passes away. It lists the family members who can legally receive the deceased person's property, assets, and other belongings. This certificate is important for handling matters like transferring ownership of assets and settling financial issues after someone dies.
| Section | Key Points |
|---|---|
| Understanding Personal Loans | Definition, Features, Importance |
| Legal and Financial Implications | Legal Obligations, Role of Co-borrower/Guarantor, Liability of Heirs |
| Managing the Loan | Insurance Cover, Steps for Family Members, Loan Settlement Process |
| Impact on Credit Score | Effects on Borrower’s, Co-borrower’s, Guarantor’s Credit Scores |
| Legal Procedures and Documentation | Informing the Lender, Required |
When someone who borrowed money passes away, it's important for their family or anyone who co-signed the loan to take charge. Knowing the rules and financial effects, how insurance can help, and what to do to pay off the loan can reduce worries and keep finances steady. It's crucial to tell the lender quickly, check any insurance they had, and use their money and belongings to pay back what's owed. This way, families can handle this tough time better and avoid unfair debt problems.
If there is no co-borrower or guarantor, the lender will approach the legal heirs for repayment. The heirs are only liable to the extent of the estate they inherit from the deceased borrower.
Loan insurance, also known as loan protection insurance, covers the outstanding loan amount if the borrower dies. The insurance pays off the remaining loan, ensuring that the family is not burdened with debt.
In some cases, lenders may offer settlement options or renegotiate the loan terms to ease the repayment process for the family. It is advisable to discuss this with the lender.
Legal heirs (that means family members) should promptly inform the lender, check for any existing loan insurance, and understand their liability is limited to the inherited estate. Consulting with a legal advisor can also provide clarity on their obligations.
No List Founds!
Your email address will not be published. Required fields are marked *
