How lenders recover loans if the borrower dies?

If a person, who has taken a loan, dies, many families become unsure about what will happen to their loans or the other outstanding amounts. To prevent these confusions, the lending institutions, like banks, take steps for the recovery of dues based on the category of loans. 

Read below to find out what steps financial institutions take in case a loan borrower dies.

Home loans: Home loans are long-tenured products and lenders, while sanctioning the loan, ensure that there is a co-applicant so that recovery is not affected in case the borrower dies. Many times they don’t sanction loans if the borrower does not have an adequate life insurance policy.

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If the borrower dies, the co-applicant, who is still alive, continues to repay the loan.

However, if there is no co-borrower, then the lenders will approach the insurance company to claims the borrower’s life insurance option. In case there are co-borrowers and the deceased borrower had a group life insurance policy, the lender will claim the insurance amount. The remaining amount will then be paid by the co-borrower.  

In case there are no co-borrowers, and the insurance claim is not adequate, the lenders will then go to the legal heirs and provide them some alternatives to pay off the loan. 

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The lenders can either ask the family to repay the loan by arranging money or they can ask the legal heir, after checking their creditworthiness, to become a co-applicant so that they can pay off the EMI. 

However, if any of the options do not work out, the lenders can then, under Sarfaesi Act, take possession of the house and auction it to recover its dues. 

No other person can pay off the loan on behalf of the borrower as lenders don’t allow it due to KYC and money laundering regulations. 

Personal loan or outstanding credit amount: Personal loans and credit cards are unsecured and there is no provision that makes their legal heir repay the loan. The lender writes off the personal loan if the borrower dies. The credit amount is also written off when a card user dies. However, in the case of credit cards and debit cards, users have credit card insurance, which pays out the outstanding amount in some cases. 

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Vehicle loan: If a person takes a loan for a car or a two-wheeler, it is mortgaged with the lender until the loan amount is not paid. If the borrower dies, the lender approaches the family to settle the loan amount. In case the family cannot repay the dues, the lender takes possession of the vehicle and auctions it to recover the outstanding amount.

If the legal heir wants to repay the EMI, the lender asks them to take ownership of the vehicle by transfer and they book a new loan in their name. 

Education loan: Education loans are mostly not sanctioned without a guarantor, who are generally parents. Parents are also asked to offer collateral when the loan amount is higher than a specific limit. A collateral is a property that the borrower agrees to give if the loan is not repaid.

If the borrower dies, the guarantor is approached to repay the loan amount. Meanwhile, the lender can also auction the collateral to recover the dues of the loan.