Who Settles the Loan When the Borrower Dies?

Loans are a huge financial undertaking that we take up when purchasing a property. Most of us go with a monthly repayment scheme that covers 10-15 years to repay the loan.

While we have planned for a long-term investment, plenty of unpredictable circumstances can come up which puts our loan repayment scheme to question. One of the possibilities is the death of the borrower.

In cases such as that, the bank has come up with potential steps to be undertaken that can help.

Usually,when you secure a loan, you are always encouraged to sign it with a co-borrower. In the event of the death of any one of the borrowers, the loan has to be repayed by the other. Keep in mind, this condition stands even if the co-borrower is not an earning member of the family.

So, when the home owner passes away, the loan repayment will automatically pass to the legal heir or the co-applicant. The loan amount that is still left unpaid becomes the duty of the co-signer or the heir to repay it. They are legally bound to make sure the loan is paid off. 

If the loan cannot be repayed by the co-signer or the legal heir, the ban can exercise its right to seize the property from them, or even file a case against them in a court of law. Not only will this lead to lengthy legal battles, this can also affect the CIBIL score of the co-signer and legal heir.

Seizing a property or entering into a legal battle are long, costly affairs that even the banks would like to avoid. By taking the right steps, you can make sure to create a sustainable repayment plan.

Repayment of the Secured Loan:

When it comes to repayment, the family must ensure that they submit the death certificate of the borrower, along with the necessary details to the bank. Upon doing so, the bank will discuss your next steps and payment options with you. 

Ways in which the bank can help:

Postponement: The bank can postpone your repayment schedule until a particular time. You can take this time to sort out your finances and make a payment plan for the loan. 

Restructuring: The second option that you can consider is to restructure your repayment period. For instance, if your initial repayment scheme was set over 15 years at Rupees X per month, upon the death of your borrower, the bank has the ability to extend your loan for a longer period of time, thereby making your monthly EMIs much cheaper.

This is a convenient method of repayment, and even though you have a loan for a longer period of time, you will not risk the loss of your property.

Home loan insurance

When securing a loan for buying homes, banks usually ask borrowers to buy a home loan insurance policy as well. This is an extremely important mechanism that helps to protect the borrower and family in the event of the death of the borrower. 

A home loan insurance typically works the same way as any insurance; upon furnishing the details and certificates required, the insurance company will settle the rest of the home loan amount with the bank. The property will no longer be in the control of the bank, and will be freed from the loan amount.

While this is an extremely beneficial policy to invest in, keep in mind, home loan insurance also comes with its limitations. They have highlighted conditions upon which the insurance will become null and void.

Here are the conditions when the insurance would not work.

• Death by suicide
• Injuries that self inflicted
• Alcohol induced deaths
• Death caused by STDs
• Death by murder committed by a beneficiary

Bank loan insurance is a crucial step that must be undertaken. This not only protects you from unexpected news, it also ensures your next of kin and heir remain protected.

Repayment of Unsecured Loan:

While the above mentioned criteria applies for those who had sought secured loans (ie, loans that have collateral attached to it), Unsecured loans have different criteria. An unsecured loan has no collateral attached to it, so in the advent of the death of the borrower, the bank has no leverage.

They have no property that they can seize in case of non-payment of loan. In that case, the bank has no other option but to seize other properties that are in the name of the co-signer or the heir to pay off the loan. In extreme cases, the bank can even resort to a lawsuit.

It is considered best practice to only seek secured loans so that you can protect your other properties and income streams from being seized due to such circumstances.

Repayment of loans are a financial undertaking that requires planning and management of resources. While the death of a paying family member can impact the plan, make sure you speak to the bank officials about the next options in a timely manner.