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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.
The term co-signing refers to when two or more people borrow a loan together, and 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.
Community property states
The rights of surviving spouses and relatives are different in nine states, known as community property states. These states are:
- New Mexico
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
One way to help make repayments on your car loan easier, and save money along the way, is to find the right car insurance that suits your needs and keeps you protected. The licensed broker and comparison shopping app Jerry is your best bet for finding savings.
Jerry will generate competitive quotes from 50+ top providers in less than a minute. Jerry gathers your information from your past insurer, suggests the best coverage for you, and will even cancel your old policy.
Basically, you get all of the savings and coverage, with none of the usual stress.
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What’s the difference between secured and unsecured car loans?
A secured loan is supported by collateral assets, such as a car. So if repayments stop (which can be caused by the death of the borrower), then the lender can repossess and sell the vehicle to cover the remaining portion of the loan.
On the other hand, an unsecured loan has no collateral to protect the borrower. Unsecured loans are usually taken out by individuals with bad credit, and any unsecured debt leftover will become the responsibility of the estate or the co-signer.
What happens if the deceased individual doesn’t have a will?
If someone dies without a will, then state-specific statutes determine how property and assets will be distributed through the estate.
If there is a co-signer on the vehicle, then the car will become theirs no matter if there is a written will or not.
The law is different in every state, though, so be sure to consult an estate planning or probate attorney if you’re unsure about the process where you live.
Can I keep my loved one’s car and avoid paying off the loan?
No. If you don’t take possession of the loan to repay it, then the lender is legally able to repossess the car and sell it in order to recoup lost costs.