Life is uncertain, wherein an emergency can arise at any time. For a financial emergency, a personal loan, which is widely available and can be obtained easily, can come to the rescue. However, in the midst of repaying a personal loan, what happens if the borrower dies? How do the bank and the borrower’s family members deal with the situation? In this article, we will understand what happens when a personal loan borrower passes away.
Personal loans: Unsecured in nature
A personal loan is an unsecured loan. It means there is no underlying collateral or security that the bank can repossess, sell, and recover the outstanding loan amount in the event of the borrower’s death. Security is available only in the case of secured loans, such as a home loan, vehicle loan, gold loan, etc. As there is no security available, the bank will need to look at other ways to recover the outstanding loan amount.
Loan protection insurance
The bank will check if any loan protection insurance plan is in place. If yes, the bank will file a claim with the insurance company for the outstanding loan amount. The insurance company will pay as per the policy’s terms and conditions. On recovering the outstanding loan amount, the bank will credit it to the personal loan account and close the case.
Co-applicant or guarantor
In the event of the borrower’s death, the bank will check if there is a co-applicant or guarantor for the personal loan. If there is a co-applicant, the bank will ask them to pay the loan. If there is no co-applicant, and there is a guarantor, the bank will ask the guarantor to repay the outstanding loan amount.
The co-applicant and the guarantor have the legal obligation to repay the loan in the absence of the primary borrower. If the co-applicant or guarantor fails to cooperate, the bank may initiate legal action against them to recover the loan amount. In the event of non-payment, the bank can report the default to the credit information companies (CICs). The default will be reflected in the co-applicant / guarantor’s credit report, and their credit score will take a hit. Thus, a co-applicant or guarantor provides an additional layer of security for the bank in the event of the primary borrower’s unfortunate death.
Recovery from the deceased borrower’s estate
In the absence of any co-applicant or guarantor, the bank can recover the outstanding loan amount from the deceased borrower’s estate. The deceased borrower’s estate will include the assets that they have left behind. They can consist of the balance in the savings bank account(s), fixed deposits, shares, mutual funds, gold, real estate, small savings schemes, and any other assets.
If these assets are insufficient to recover the entire outstanding loan amount, the bank will check if the deceased borrower had any life insurance policy/policies. If yes, the outstanding loan amount can be recovered from the money paid by the life insurance company in the form of claim settlement.
Does the legal heir have to pay?
If the legal heir is a co-applicant or guarantor, they have the legal obligation to pay the loan in the event of the primary borrower’s death. If the legal heir of the deceased borrower is neither a co-applicant nor a guarantor, then they must check the personal loan agreement. Are there any clause(s) that specify what happens to the outstanding loan amount in the event of the borrower’s death? Check whether the clause(s) mention that the legal heir has to pay the outstanding loan amount in the event of the borrower’s death. If yes, the legal heir will have to pay.
In the absence of any such clause(s) in the personal loan agreement, the bank cannot ask the legal heir to pay on behalf of the borrower in the event of the borrower’s death. However, if the legal heir wishes, they can choose to pay the outstanding amount voluntarily. Once the outstanding amount has been paid and the loan account is closed, collect the ‘no dues’ certificate and keep it for record purposes.
If the legal heir has inherited any assets from the deceased borrower, the bank can recover the outstanding loan amount from the legal heir. However, the amount that can be recovered is limited to the extent of the amount the legal heir has inherited from the deceased borrower.
Loan write-off as a loss
At times, a situation may arise in which none of the earlier discussed options will work. In such a scenario, the bank will be unable to recover the outstanding amount of the personal loan. The bank will be left with no other option but to write off the outstanding amount as a loss.
What should the family members do?
In the event of the borrower’s death, family members must inform the bank of the borrower’s death. They must submit the borrower’s death certificate and other required documents to the bank. Based on this, the bank will determine the next step in recovering the outstanding loan amount.
In the event of any doubts, family members must consult a lawyer and take legal advice to safeguard their interests.
Should you opt for a loan protection insurance plan?
Do you currently have an ongoing personal loan? If yes, it is always better to take a loan protection insurance plan. In the case of an unfortunate event leading to an untimely death, the insurance coverage will be beneficial to the family members. The insurance company will pay the claim and settle the loan. The insurance cover assures the bank of loan repayment and protects the family from any loan-related hassles that may arise in the event of the borrower’s death.
Life is uncertain. You cannot control what is coming next. However, insurance protection can safeguard your family from the financial impact of untimely death.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.
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