Banks and financial institutions have the right to initiate legal proceedings against a borrower if a loan is not paid within the specified tenure. However, if the primary borrower dies before repaying the loan, the bank can recover the sum from the co-borrower, guarantor, or legal heir.
It must be noted that the shifting of the liability depends upon the type of loan taken and the collaterals.
In the case of a personal loan, which is an unsecured loan, the lenders cannot ask the legal heirs or the surviving members of the dead borrower to pay the outstanding amount.
Such loans do not involve any collateral; hence, the bank cannot seize and sell any asset of the borrower to recover the amount. The outstanding balance is eventually written off and added to the NPA account by the bank.
However, if there is a co-signer or a co-applicant, then the bank can shift the liability to that person after the primary borrower’s death. The same applies to other unsecured loans, such as credit card loans.
Currently, most unsecured loans come with insurance for the primary borrower. The insurance covers the loan amount and remains valid for the entire loan repayment period.
In the unfortunate event of the primary borrower’s death, the outstanding loan amount can be recovered through insurance. Generally, the borrower pays the premium for such insurance while availing of the loan.
When the primary borrower of a home loan passes away before repaying the loan, the lender usually checks for any co-applicant of the loan. If the co-applicant cannot service the loan, the bank approaches the family members, legal heirs or the guarantor.
If any of them takes the responsibility to repay the home loan, the lender returns the secured property to its owners. But, if no one assures to pay the outstanding amount within the scheduled time, the bank proceeds to seize and sell the property to recover the loan.
In such cases, the legal heir of the borrower can reach out to the lender and ask to restructure the loan.
When a car loan is not repaid due to the death of the borrower, then the legal heirs are asked by the bank to repay it. If the legal heir refuses, the lender seizes and auctions the car to recover the outstanding amount.