What Happens To A Personal Loan If The Borrower Dies?

Sometimes a borrower unfortunately passes away in the middle of the loan repayment. But, what happens to a personal loan if the borrower dies? Know here!

2 Nov,2022 10:18 IST 285 views
What Happens To A Personal Loan If The Borrower Dies?
When a person borrows money from a bank or a non-banking finance company (NBFC), he or she is not just supposed to return the money in a stipulated time but also to do so along with other charges such as interest.

The lender has some recourse based on the type of loan. If the money has been advanced against an asset, say a motor vehicle in case of an automotive loan or a real estate property in case of a housing loan, they can invoke the pledge and take possession of the asset furnished as a security by the borrower. This comfort is missing in case of a personal loan.

There are times when the borrower unfortunately passes away in the middle of the loan repayment period. The lender’s treatment of such loans depends on the type of loan in question.

The ownership of the assets of the deceased passes on to the legal heirs. For secured loans, as a result, the legal heirs do not just see the possessions of the person who has passed away pass on to them but also their liabilities.

Notably, the legal heirs have the opportunity to pay back the sum due and take back the possession of the pledged asset from the lender.

Personal Loan

In the case of a personal loan, the money is advanced without any collateral as it is a form of unsecured loan. If a person who has taken a personal loan dies in the middle of the repayment period, the lenders do not have any recourse. This is because the loan is not backed by any security.

As a result, lenders have to write down the value of the outstanding balance of a personal loan if the borrower dies before paying back. The lenders cannot ask the legal heirs of the deceased to pay up the balance due.

That said, there are some issues that need to be kept in mind.

• Co-Borrowers:

If a personal loan has been taken by more than one individual and one of them dies, the liability of the remaining outstanding falls on the co-applicant. This is a scenario when a husband and wife have taken a personal loan either to increase the eligible amount for the borrowing or if the principal borrower has a low CIBIL score and the co-applicant with better creditworthiness is brought in to assuage a lender. In the unfortunate case of both the co-applicant dying in an accident together, again the lender does not have any recourse despite their being a co-borrower.

• Informing The Lender:

The family members of the deceased need to inform the lending institution about the demise of the person who has availed the personal loan. This way lender gets an early alert and can write off the loan amount as a non-performing asset. In the absence of this information, if the deceased has money in their bank account and the loan agreement involves a direct debit of the loan amount via EMI, then the money will keep getting deducted from the account even after the demise of the borrower.

Conclusion

What happens to a loan, or rather the outstanding balance of a loan, if the borrower dies in the middle of the repayment period before the loan account is closed depends on the type of loan.

If the loan is a collateral-backed debt then the lender can ask the legal heirs of the deceased to pay up or the pledge would be invoked and the security that has been furnished as a security can be taken up for possession and then sold off to recover the money. However, in the case of a personal loan, there is no security and the money needs to be written off. The lender cannot ask the legal heirs to pay up the balance outstanding of the personal loan.

However, if there is a co-applicant in the personal loan, whether they are the legal heir of the deceased or not, they are supposed to bear the liability of the entire outstanding loan.

In any case, borrowers should take out a loan only from a reputed lender like IIFL Finance to ensure that, in the unfortunate instance of their demise, their family members do not come under any undue pressure to repay the outstanding amount. IIFL offers personal loans of up to Rs 5 lakh swiftly without any hidden clauses to persons with competitive interest rates and flexible repayment options for up to 42 months.

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