A car loan death clause, found in loan paperwork, provides details about what happens to an auto loan if the borrower dies.
The estate of the borrower is usually responsible for the repayment of the loan as well as the liquidation of assets to pay it off. That being said, it’s possible that other unexpected issues may arise.
While it can be relatively easy to cancel a
car insurance policy after a loved one’s death, car loans are more complicated. That’s why
Jerry has put together this guide to answer all the possible questions you may have about a car loan death clause.
Continue reading to learn more about car loan death clauses.
What happens to a car loan when the borrower dies?
Depending on your relationship with the deceased—or if you’re looking to plan ahead for your own car loans—the circumstances surrounding the loan and who becomes responsible for paying it can vary.
If you’re a co-signer
If the loan was co-signed by a surviving relative, they are responsible for paying the remaining balance not covered by the estate.
co-signing refers to when two or more people borrow a loan together. the estate refers to the total assets and debts that are combined when an individual dies.
The monetary value of the estate is what will help pay off any remaining debts and outstanding loans (such as a car loan).
Even if the co-signer won’t be inheriting the car, they are still responsible for repaying the loan.
Surviving spouse rights
Surviving spouses, relatives, and other beneficiaries of the deceased won’t be responsible for paying any remaining debts.
This, however, does not apply if they are co-signer on the car loan. So even if the lender or a collection agency asks you to repay the loan, you are not legally responsible for it if you didn’t co-sign the loan.
The only exception to this rule is if you live in a state that has specific laws regarding this issue.
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The rights of surviving spouses and relatives are different in nine states, known as community property states. These states are:
Alaska is a hybrid state, meaning it allows for community property in some instances and respects surviving spouse rights in others.
In community property states, any assets purchased—or loans taken out—by one spouse automatically become jointly owned by the other spouse.
If a deceased individual has a $5,000 auto loan taken out, for example, then their spouse is responsible for $2,500 of that loan. It doesn’t matter if the surviving spouse was or wasn’t on the title of the car, or if the loan was taken out in one name—it is all considered joint property.
Key Takeaway In community property states, any loans that were taken out by one spouse automatically become jointly owned by the other spouse.
What happens to the lender?
There are a couple of outcomes that may occur for the lender, depending on whether or not the loan is repaid.
If the car loan is paid off
As long as the loan is successfully transferred to a living relative or spouse, they can continue making repayments normally.
You’ll just have to inform the lender that the original applicant won’t be making any further repayments.
If you are able to fully pay off the car loan to the lender, then you can take ownership of the vehicle.
If car repayments are stopped
As soon as loan repayments stop, the lender is allowed to confiscate the vehicle.
The lender can then choose to auction the car off in order to recoup losses on the loan—and while this may seem harmless if you didn’t intend to maintain ownership of the vehicle, it can end up affecting your credit score if you are a co-signer.
You also won’t get back any money put into the car by selling it yourself, as the lender will receive all of the money made in the auction.
Key Takeaway A lender can repossess the vehicle if loan repayments stop.
What happens if you can’t afford to repay the loan?
If you are responsible for repaying the loan but are unable to do so, there are a number of things that might happen.
You may have to sell some of the deceased’s assets or you might have to sell the car itself to pay off the auto loan. If you can’t, the car will end up being repossessed by the lender.
Be sure to reach out to other heirs in the estate before you decide to sell the car or stop repayments, as another member of the family might be able to assume the payments and take ownership of the car.
If you’re a non-spouse member or a beneficiary of the estate that didn’t co-sign on the loan, you cannot be forced to take responsibility for the loan.
Maintaining affordable insurance
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