Personal Loans After Death: The Rules Most Borrowers Miss

Upon a personal loan borrower's death, the debt is first covered by loan protection insurance, if available. If not, a co-applicant or guarantor becomes responsible for repayment.

Personal loans are a great relief for many during unexpected financial crises. Their specialty is that they can be obtained quickly compared to other loans and do not require any collateral. However, if the applicant dies before the loan is fully repaid, what happens to the remaining amount? Does the family have to pay that amount?

Foreclosure is not possible

Personal loans fall into the category of unsecured loans. This means the loan is obtained without pledging a house, vehicle, or gold as collateral. Therefore, if the borrower dies, the bank has no legal authority to foreclose on the family's house or other properties citing default in repayment.

Is there insurance coverage?

After a death, the first thing banks check is if the loan has 'loan protection insurance.' Most banks offer this insurance for a small premium at the time of disbursing the loan. If such coverage exists, the insurance company will pay the remaining amount to the bank. This closes the loan and relieves the family of the liability.

Guarantors and Co-applicants

If more than one person has applied for the loan jointly, the other applicant is liable for repayment even if one of them dies. Similarly, if someone has stood as a guarantor for the loan, the bank can ask the guarantor to pay the remaining amount after the applicant's death. If they fail to pay, it will negatively affect their credit score.

How much are the heirs responsible?

If the legal heirs (children, spouse) are not guarantors or co-applicants for the loan, they do not have to pay the amount. However, there is an important point to note here. If the deceased person's deposits, property, or gold are transferred to the heirs, the bank can recover the debt up to the value of that property. For example, if a person dies with a loan balance of ₹5 lakh and leaves behind assets worth ₹3 lakh, the bank can recover the debt from that ₹3 lakh. But the heirs are not obliged to pay the remaining ₹2 lakh.

If nothing is recovered, it's a 'Write-off'

In a situation where there is no insurance, no guarantor, and no assets, banks 'write off' the amount. This means the bank considers the amount as a loss and closes the loan.

Points for family members to note:

Inform the bank immediately if the borrower dies.

Submit the death certificate to the bank and provide a written application.

Carefully review the documents signed when taking the loan. If bank employees pressure you to repay the loan, do not hesitate to seek legal help.