Have you ever wondered what happens if a person takes a home, car, or any other loan from a bank and, for some reason, dies suddenly during the loan period? Many people believe that the bank waives off the loan if the borrower dies. However, this is not true. The bank recovers the loan even after the borrower’s death. In India, there are also specific rules regarding loan recovery after the borrower’s death. Let’s understand who is eligible to repay the loan after the borrower’s death. In this article, we also share the recovery rules and process.
Home Loan
In the case of a home loan, if the borrower dies, the bank first contacts the co-borrower and requests them to repay the outstanding loan. If there is no co-borrower, the bank approaches the loan guarantor or the legal heir for repayment. If the loan is insured, the bank asks the insurance company to settle the loan. If none of these options are viable, the bank is entitled to auction the property to recover the outstanding loan.
Car Loan
If the borrower of a car loan dies during the loan tenure, the bank contacts the borrower’s family to recover the remaining amount. If the legal heir refuses to repay, the bank has the right to repossess the vehicle and sell it at auction to recover the loss.
Personal and Credit Card Loans
Unlike secured loans, unsecured loans such as personal or credit card loans operate differently. If the borrower dies during the loan tenure, the bank cannot demand repayment from the legal heirs or family members. However, if there is a co-borrower, the bank can initiate recovery proceedings against them. In the absence of a co-borrower or other means of recovery, the bank declares the loan a non-performing asset (NPA).
Co-Borrowers
If a personal loan is taken jointly by two individuals and one of them passes away, the responsibility to repay the remaining loan amount falls on the co-applicant. This often happens when a husband and wife take a loan together, either to increase the eligible borrowing amount or because the primary borrower has a low CIBIL score, and the co-applicant with better creditworthiness supports the application. However, if both co-applicants pass away together, such as in an accident, the lender cannot recover the loan despite having a co-borrower.
Informing the Lender
The family of the deceased must inform the lending institution about the borrower’s death. This helps the lender mark the loan as a non-performing asset early. If the lender is not informed and the borrower’s bank account still has funds, the EMI may continue to be deducted automatically, even after the borrower’s death.