Many families who have lost their breadwinner are unsure of what will happen to the deceased’s outstanding credit or credit card. Working with debt collection agencies would be the last thing on their mind. The steps financial institutions take to collect fees vary depending on the loan category. In some cases, like a home loan, lenders have regulations to help them recover. In other cases, such as a personal loan, there is no legal recourse for a lender.
Much depends on collateral and on whether there is a surety, a co-applicant or a co-borrower in the loan. Let’s look at the steps a lender might take to collect credit.
Home Loans: Because home loans are long-term products, lenders structure them so that their repayment is not compromised in the event of the death of borrowers. The lenders ensure that there is a loan co-applicant. Many do not sanction the loan unless the borrower has adequate life insurance.
If one of the co-borrowers dies, the other is responsible for repaying the loan. The living co-borrower must continue to repay the loan.
“The co-borrower should inform the lender of the death of the other borrower. The lender will take the deceased off the loan. If the repayment was linked to the deceased’s bank account, the lender will change it. The living co-borrower must begin repaying their bank account, “said Gaurav Pawra, CEO of Clix Housing Finance.
If the borrower had taken out group life insurance with the lender, he would turn to the insurance company with a claim. The lender will cut the loan based on the insurance payout. The co-borrower pays the remaining amount.
If the loss amount is higher than the outstanding loan, the insurer pays the additional money to the nominee. If a borrower had individual life insurance, the nominee could take it and settle the loan.
If there are no co-borrowers, the lender will first resort to the option of life insurance. If the insurance claim is insufficient to pay off the entire loan, the lender will offer alternatives to the legal heirs.
The first option for the family is to repay the loan by arranging money. If the legal heir, such as the deceased’s son, is willing to pay the EMI, the lender will add him as a co-applicant after checking his creditworthiness.
If the family (legal heirs) cannot repay the outstanding amounts, nor can legal heirs be added to the loan, the lender can take possession of the house under the Sarfaese law. It can then auction the property to collect its fees.
Due to KYC and money laundering regulations, no lender will allow another person to pay the EMI on behalf of the borrower.
Personal loan / credit card: Personal loans and credit cards are unsecured. When a borrower or card user dies, the lender will write them off. “There are no provisions that make the legal heirs liable for repayment of a loan,” said Satyam Kumar, CEO and co-founder of LoanTap.
According to Kumar, most lenders and card issuers these days ensure that personal loan insurance is in place. After the borrower’s death, the lenders would file a claim with their affiliate insurer.
“In some cases, the family may be willing to repay the personal loan out of love and affection for the deceased. The lender could waive fees and penalties (if applicable) and would even be willing to have a haircut if necessary, “said Adheer Dhar, a banker who worked with Citi.
Vehicle credit: When a borrower takes out a loan for a car or two-wheeler, the vehicle is mortgaged with the lender. After the borrower dies, the lender turns to the family to settle the loan. “If the family is unable to make the repayment, the lender can take possession of the vehicle they are auctioning to collect the fees,” said Kumar.
According to him, on rare occasions when the legal heir is willing to repay the EMI, the financial institution can book a new loan on their behalf and request the family member to take over the vehicle by way of transfer.
Education loan: Most lenders do not provide an education loan without a sponsor. If the loan amount exceeds a certain limit, parents of students must also provide collateral. If the borrower dies, the bank turns to the guarantor (usually the parents) to make the repayment. The financial institution can also auction the property offered as collateral if the surety cannot repay the loan.
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