Personal Loan

What Happens to a Personal Loan if the Borrower Dies?


No one wants to borrow money to make ends meet. Nevertheless, due to unprecedented circumstances, many have to seek external help to fulfil their monetary requirements. While some have to borrow money to finance their education, others take out loans to repay their other loans. The number of people borrowing personal loans continues to increase because of their fast payments and easy procedures.

But what happens to a personal loan after the death of a borrower? Personal loans are unsecured loans that are not lent based on collateral. An attractive CIBIL score is required to get a personal loan. Consequently, the question that hovers around is how banks get their money back when a borrower dies. This article answers these questions by expounding on essential details about the subject. Keep reading to learn more about personal loans and the death of a borrower.

Why do more and more people take out personal loans?

Financial requirements are often urgent. Apart from the simplified payments, several other factors make personal loans popular among borrowers. 

  1. Fast Processing: One of the major reasons why people opt for personal loans is fast money processing. Banks usually credit the money in the borrower’s account within 24 to 48 hours.
  2. Easy to Avail: Personal loans, unlike other loans, do not require a lot of documentation, which makes it easier for people to avail of them. One only has to submit documents like identity proof, ITR statements, address proof, and income proof. 
  3. Competitive Interest Rates: Borrowing personal loans has become easier as various banks are now offering them. Many lenders provide them at attractive interest rates, giving borrowers a chance to apply for the lowest one. 
  4. Simple Repayment Process: Personal loans are, furthermore, easy to repay, which makes them the favourite of many. The buyer can choose the repayment tenure from one year to five years based on comfort and ease. 
  5. Multi-purpose: Unlike other loans, like home loans or car loans, personal loans do not restrict the borrower from using the money for a specific purpose. On the contrary, these loans can be used for any purpose. Many borrowers even use the loan money for debt consolidation. 

What happens to a personal loan upon the death of the borrower? 

Personal loans are unsecured. As a result, upon the unfortunate demise of the borrower, lenders cannot auction the belongings to recover the loan amount. Furthermore, in the case of an unsecured loan, family members could also not be asked to repay the money. 

However, there are several measures that a lender can take against a personal loan if the borrower has died:

  • Sometimes, there is a co-applicant on the personal loan. If the borrower has died and the application has a co-signer, then the bank has the right to recover the loan amount from this co-signer.
  • If the borrower had insurance before his demise, then the insurance company is responsible for the repayment of the personal loan. 
  • If the legal heir of the borrower willingly becomes the co-applicant and agrees to repay the loan, then the bank gets the amount back from the legal heir. However, banks cannot force the heir to repay the amount. 
  • If none of the above-mentioned methods works out in the banks’ favour, the lenders write off the amount to the NPA account. 

Repayment of the Personal Loan after the Death of the Borrower

After the unfortunate death of the borrower, the family or the co-applicant of the borrower must know the necessary steps for the repayment of the loan. 

  • After the demise of the borrower, a family member or a co-signer needs to inform the bank about the death to avoid the loan repayment continuing on normal terms. 
  • Once informed, if you are a co-applicant, you will be responsible for the repayments. On the other hand, if you’re a family member, you can request the lender settle the amount. 
  • In the next step, the bank will check if the borrower has an insurance policy. In the case of a policy, the insurance company will be held liable to pay the amount back to the lender. 
  • If the borrower did not have any insurance, then the bank checks to see if the borrower left any assets or properties for its legal heir. If yes, the bank can file a suit to recover the amount of the loan. 
  • If the loan amount is still not completely repaid to the bank, then it proceeds to write off the loan to the NPA account. 

Wrapping Up 

Death is inevitable and uncertain. However, when there is the death of a personal loan borrower, the loan repayment process changes. As personal loans are unsecured loans, banks cannot auction the person’s assets or property to get their money back. However, if there is a co-applicant, he or she can be held responsible for the repayment. In case of no co-signer, the insurance company bears the responsibility to pay back the amount. Nevertheless, if the borrower did not have an active insurance policy at the time of demise, then the bank ultimately writes off the loan in the NPA account. 

When buying a personal loan, reading the terms of the loan is indispensable to avoid any misunderstanding and unnecessary burden while paying off the amount. Personal loans can be messy at the death of the borrower; consequently, it is always better to choose a bank that is transparent about its terms and conditions. 

To read more such articles, visit the Piramal Finance website.