Taking loans to meet financial needs is common among individuals. Banks provide various loan facilities, including personal loans, home loans, car loans, and credit cards. When borrowers take these loans, they commit to repaying them within the loan tenure. However, what happens if the borrower passes away before clearing the dues? Who becomes liable for the outstanding loan amount? Let’s delve into this crucial topic to gain a clear understanding.
The Importance of Repaying Loans
Before we explore the liability aspect, it’s essential to highlight the significance of repaying loans. When you take a loan, you enter into a contractual agreement with the bank, obliging you to repay the borrowed amount along with interest in Equated Monthly Installments (EMIs). Failure to do so can lead to legal actions by the bank against the borrower.
Who Bears the Loan Liability After the Borrower’s Death?
The responsibility of repaying the loan after the borrower’s demise depends on the type of loan and whether any collateral is involved. Let’s examine the scenarios for different types of loans.
In the case of a home loan, if the borrower passes away, the remaining loan amount falls upon their successor. If the successor is unable to repay the loan, the bank may choose to auction the property to recover the outstanding debt. However, if the home loan is insured, the loan amount can be recovered from the insurance company. Term insurance can aid in completing the legal process, and the claim amount is deposited into the nominee’s account. The legal heir then has the right to utilize the claim amount to settle the loan dues. If the loan was taken jointly, the responsibility of repayment falls on the co borrower.
Car Loan, Personal Loan, and Credit Card
For car loans, banks usually reach out to the family members of the deceased borrower. If a legal heir wishes to keep the car and is willing to pay the dues, they can do so. However, if no family member comes forward, the bank may repossess the car and sell it to recover the outstanding amount.
Personal and credit card loans typically don’t involve collateral. In such cases, banks cannot recover the outstanding amount from the borrower’s legal heirs or family members. If there was a co-borrower, they might be responsible for repaying the loan. Otherwise, the bank may declare it as a nonperforming asset (NPA).
Understanding the implications of loan liability after a borrower’s death is essential for both borrowers and their families. Different types of loans have varying repayment procedures, and the presence or absence of collateral plays a significant role. To ensure financial security, borrowers should consider taking insurance when obtaining loans and keep their family members informed about their financial obligations.