What Happens to a Car Loan When the Borrower Dies?

When an individual secures a car loan, the expectation typically involves making regular payments until the loan is fully paid. However, it’s crucial to consider the financial implications should the borrower unexpectedly pass away. While this might be a challenging topic to discuss, understanding it becomes essential when navigating the financial affairs of a deceased loved one. The car loan does not automatically dissolve. Responsibility for it is determined by several factors, including the presence of a co-signer, the stipulations of the loan agreement, and the relevant estate laws.


car loan application


What Happens to the Car Loan?

Generally, when a borrower dies, the car loan becomes part of their estate, which is the total sum of their assets and liabilities. The executor or administrator of the estate is typically responsible for handling the outstanding debts. The vehicle can be sold to cover the remaining loan balance, or if the estate has enough assets, the loan can be paid off without needing to sell the car.

If the person who passed away had a will, and they left the vehicle to someone specific, that person has the option to continue the loan payments, assuming the lender is on board with it. But it’s not a straightforward switch; the person who inherits the vehicle usually needs to prove they can handle the loan on their own. Essentially, they need to apply for a new loan, and the lender will decide if they’re financially capable of taking on the responsibility based on their credit history and financial standing.

The Impact of a Death Clause

Some loan contracts have a “death clause”, mandating the full repayment of the loan after the borrower’s death. The executor of the estate usually settles this debt using the deceased’s assets. If the assets can’t cover the debt, the executor may need to return the car to the lender or sell it to repay the loan. An insurance policy could potentially cover the loan, easing the burden on the estate and executor. Understanding a death clause is crucial, as it can affect the borrower, their heirs, and possibly a co-signer.

The Role of a Co-Signer

If a car loan features a co-signer, this individual becomes legally liable for the loan if the primary borrower dies. Indeed, the co-signer’s responsibility is to continue the loan payments, ensuring the debt doesn’t fall into default. This obligation stands irrespective of whether the co-signer has possession of the vehicle or uses it. In essence, being a co-signer means accepting a potential liability for the loan, which could come into effect under unfortunate circumstances such as the death of the primary borrower.

Key Takeaways

1. A car loan doesn’t simply disappear when the borrower dies. It usually becomes part of the deceased’s estate and must be handled by the executor or administrator.

2. Notably, a death clause in the loan agreement may necessitate the loan to be paid in full immediately upon the borrower’s death.

3. A co-signer, if one exists, is obligated to continue making payments on the car loan in the event of the borrower’s death. Failure to make payments will impact the co-signer’s credit record.

To sum up, comprehending the effects of a borrower’s death on a car loan is key to properly handling financial affairs postmortem. It further emphasizes the significance of thoroughly grasping all terms before agreeing to co-sign a loan or when named in a will inheriting a vehicle with a pending loan.


See AlsoCar Loan Essentials & Requirements


References


Ferry, J. (2022, July 27). What Happens To A Car Loan When Someone Dies?. Forbes.

Allcot, D. (2021, January 13). What Is the Car Loan Death Clause?. Pocketsense.


Photo Attribution

Inset image by Carolyn Booth from Pixabay.

Main image under license from Adobe Stock.

Matt Keegan
Author: Matthew Keegan
Matt Keegan is a journalist, media professional, and owner of this website. He has an extensive writing background and has covered the automotive sector continuously since 2004. When not driving and evaluating new vehicles, Matt enjoys spending his time outdoors.

Leave a Reply