Taking a bank loan is easy, but what happens if the borrower passes away before repaying it? Will the family be burdened with EMI payments? Will the bank seize property? Let’s break it down in simple terms.
Who Pays the Loan If the Borrower Dies?
The repayment process depends on several factors, including whether the loan had a guarantor, was secured by collateral, or had loan insurance.
1. If There Is a Loan Guarantor
A loan guarantor is someone who signs an agreement taking responsibility for repayment if the borrower defaults. In case of the borrower’s death, the bank will first ask the guarantor to pay the outstanding amount. That’s why becoming a loan guarantor is a serious responsibility—one must be ready to take over the EMIs if needed.
2. If the Loan Is Secured (Home, Car, Gold Loan)
Loans taken against assets like homes, cars, or gold come with collateral. If the borrower passes away, the bank has the legal right to seize the asset and auction it to recover the loan amount. For example:
- A home loan means the bank may auction the house.
- A car loan means the bank may repossess and sell the vehicle.
- A gold loan means the gold pledged can be auctioned.
3. If There Is a Co-Borrower
If the deceased had taken the loan jointly with someone (such as a spouse or business partner), the co-borrower becomes fully responsible for repaying the remaining EMIs.
4. If the Loan Is Unsecured (Personal Loan, Credit Card Loan)
Unsecured loans don’t have collateral, so banks cannot seize property directly. However, they may ask the family members to clear the dues if they inherit any assets from the deceased. If the family refuses, the bank might write off the loan after legal proceedings.
How Loan Insurance Can Save Families
Many banks offer loan insurance, which ensures that the insurer repays the outstanding loan amount if the borrower dies. This helps relieve the financial burden on the family. Loan insurance is particularly useful for:
- Home loans (large amounts and long tenure)
- Car loans (to avoid repossession)
- Personal loans (high interest rates can be a burden)
Legal Action Banks Can Take
If the bank is unable to recover the loan amount, it can take legal steps such as:
- SARFAESI Act: This allows banks to auction property without court approval.
- Civil Suit: The bank can take legal action to recover dues from the estate of the deceased.
- Credit Score Impact: If a co-borrower or guarantor fails to pay, their credit score will be affected.
How to Protect Your Family from Loan Burden
- Take loan insurance, especially for large loans.
- Understand loan terms before signing as a guarantor.
- Keep financial records organized so family members are aware of liabilities.
- Ensure legal heirs are aware of outstanding loans to avoid surprises.
