At a Glance
While it isn’t a pleasant thought to consider, it’s possible that a person may die when they have a personal loan outstanding. Knowing what happens to a personal loan if the borrower dies can help a person understand if they will be held liable for the remaining debt or if it will be forgiven.
In this article, you’ll learn:
How does a personal loan work?
To learn what happens if a personal loan holder dies, you first need to understand how a personal loan works. The lump sum of money you are given by a lender will come with an interest rate and potentially a few fees. On a monthly basis, a borrower is required to pay back a portion of that sum of money, which also includes a portion of interest and any fees. Once the entire amount has been paid back by the end of the tenor, the borrower’s obligation is complete.
Learn more: How do personal loans work?
What happens to personal loans when the borrower dies?
Given that personal loans are, in most cases, unsecured, many people often wonder what happens to personal loans when the borrower dies, given that there is no collateral for the lender to take possession of. Below are just a few of the common resolutions that occur in this situation:
1. Borrower’s estate is used for settling debts
In most cases, the first way the lender will have their money returned to them is through the estate of the deceased person. Any money or property that was left behind will be used to cover the expenses. Once this source has been exhausted, if there are still outstandings, the debt generally won’t be paid.
2. Spouse bears the responsibility of debts
If the spouse of a deceased person decides that they would like to retain the possessions of the person who has passed away, they will become responsible for the debt. In some cases, a lender may allow the debt to go unpaid if you contact them and inform them of what occurred, but be aware that this isn’t always the case.
3. Prioritization of debt payments
Generally speaking, debt payments will not be taken out of the deceased person’s estate until funeral expenses and medical expenses, along with taxes, have been taken out. However, these rules vary on a state-by-state basis, so it’s best to check your state’s rules.
Who can inherit a debt?
In some cases, the debt a deceased person has will be carried over directly to a new party following their death, or if special circumstances come into play. Below are some common examples of when this may occur:
1. Co-signers on the loan
If you were a co-signer on a loan that the deceased person took out solely for the purpose of helping them get that loan, but you didn’t contribute financially, you will be responsible now. As a co-signer, even if you weren’t contributing financially before, you are equally as liable for the loan until it is repaid in full.
Related: Cosigner Loans
2. Joint account holders
Similar to being a co-signer, if you were a joint account holder with the deceased person then you have a right to all assets or liabilities in that account. If they die and were the only person contributing financially, the responsibility will fall on your shoulders.
When thinking about what happens to your loans when you die, be cautious about what you leave to your spouse. If you leave your entire estate, then all your financial obligations will fall to your spouse who will need to sort everything out.
4. Those who didn’t follow probate laws
If you were responsible for handling the estate of a deceased person and you did not do it properly, you can actually be held liable for their remaining debt, though this is an unlikely situation.
What happens to other debt after the borrower dies?
Personal loans are just one type of debt that a person may have. You may also be wondering what happens to private loans when you die or any other type of debt. Below are a few common examples of debt and what happens when the primary borrower dies and they aren’t complete:
1. Credit cards
Co-signers and joint account holders will be held responsible for credit card debt that remains after a person dies. However, if they lived in a state with common law property, then the debt will not be passed onto anyone else.
If a person is given a house that has not been paid off in full, the beneficiary is allowed to take over the mortgage under federal law, even if they would not normally be approved for that loan themselves.
3. Medical bills
Medical bills are typically paid from a dead person’s estate before any other debt payments, besides funeral expenses, which means the will already be covered.
4. Home equity loan
Similar to a mortgage loan, the person who inherits a home that has a home equity loan outstanding on it will inherit the debt in most cases.
Related: How Does a Home Equity Loan Work?
5. Student loans
Federal student loans will be forgiven at the date of a person’s death, but private loan lenders are not required to forgive the debt when a person dies. This means that those left behind may be responsible for the payments in the future.
6. Auto loans
Generally, auto loan are paid for by the estate or by the person who inherited the vehicle. If the loan cannot be paid off then the lender will most likely repossess the vehicle.
What happens to personal loans when the lender dies?
On the other side of things when looking at what happens to a loan when someone dies, it’s possible that the lender may die before the loan is paid. Generally, the borrower will still owe the money if there was a contract which was signed, as it would become an asset to the dead individuals estate.
Generally speaking, if the house is allowed to be inherited by those you leave behind, they will become responsible for the mortgage amount that remains on the home. If other items from your estate can pay off the loan, they will be used instead.
No, in most cases personal loans are not forgiven at death unless an estate cannot pay the loan back and there is nobody to inherit the loan.
No, life insurance death benefit is not intended to be a part of a person’s estate following their death. It goes directly to the beneficiaries, as opposed to becoming a part of the assets a person left behind when they died.
Federal student loans will be forgiven when a person dies, but private loans may pass on to the spouse following a person’s death.