Do Legal Heirs Need To Pay If The Borrower Dies With Loan Outstanding?

Getting a loan these days is far more easy as compared to the earlier times. You have a month on month income stream, outstanding credit history and profile and here you go, your bank disburses the loan. But how your loan will be treated or will your legal heirs' be bound to pay the loan in case you meet untimely death and leave some loan outstanding. Here's what we will discuss and the various aspects to it.

Case 1: When the loan has a co-applicant

In case the financing has been secured in joint names then on the eve of death of one of the borrowers, the liability to service the debt is passed on to the co-borrowers. Hence, in such a case the liability of the primary applicant to pay-off the debt is passed on to the other co-borrowers.

In the case that a borrower takes out a loan with another co-applicant, the primary applicant's obligation to repay the loan is transferred to the surviving co-applicant or joint debtor.

Case 2: When the loan account was held singly

In such a case, the treatment of the loan/debt shall be decided considering the type of loan i.e. whether it is unsecured or secured debt.

Unsecured loan: In the case of unsecured loans, banks or other financial institutions cannot compel or force legal heirs to pay off the debt in case the debtor dies. This is as there is no collateral against the loan obtained. So, all in all, if the borrower has died without fully repaying the unsecured loan then the same cannot be recovered from either his/her spouse or legal heirs.

Secured loan: In this case, financial institution already has the collateral in place against the secured loan. So, here the legal heirs depending on their say on the asset kept with the bank as collateral may decide on whether to repay or not the outstanding dues. Therefore, while the creditor may seek repayment of loan by the borrowers' legal heirs, they cannot be forced to make the payment.

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