After taking a loan, the borrower must repay it to the lender within the agreed repayment period. Should the borrower default, the lender is entitled to initiate legal proceedings to recover the unpaid balance. However, the situation becomes more complex if the borrower passes away during the loan term.
The question arises: Who is responsible for settling the remaining loan balance? This responsibility varies based on the type of loan and any collateral involved. It is essential to examine how the obligation to repay is affected by the borrower’s death across different loan categories.
Home Loan
In the case of a housing loan, if the primary borrower passes away, the lender will first seek a co-borrower who may be able to fulfill the repayment obligations. If no co-borrower exists or if the co-borrower is unable to manage the outstanding loan, the lender may turn to the guarantor or the legal heir for repayment. If the deceased borrower had obtained home loan insurance, the insurance payout would be directed to the lender to settle the outstanding loan balance.
Conversely, if the borrower had only secured term insurance, the claim amount would be deposited into the nominee’s account and subsequently transferred to the legal heir following the appropriate legal processes. The legal heir is entitled to utilize the term insurance proceeds to pay off the deceased’s home loan and other debts.
In instances where no home loan insurance is in place, the lender cannot pursue the co-borrower, legal heir, or guarantor for the outstanding amount. Instead, the lender may opt to seize the property and liquidate it to recover the owed funds.
Also Read: What happens when your NACH payment fails and how to resolve it
Car Loan
In the event of the borrower’s death during the term of a car loan, the lender will reach out to the borrower’s family to recover any remaining balance. Should there be a legal heir interested in acquiring the vehicle, that individual must settle the outstanding debt with the bank. If the legal heir declines to pay the remaining loan balance, the bank is entitled to repossess the vehicle and sell it at auction to recoup its losses.
Personal and Credit Card Loans
In contrast to secured loans, unsecured loans, such as personal loans or credit card debts,
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