Getting a loan can be a complex process, but what about the situation after taking loan? You have to repay the amount with interest through EMIs. Imagine, what will happen if the person who takes a loan, dies suddenly! Then who will pay the EMI?
What are the rules?
First, it’s important to understand that there are two types of loans: secured and unsecured. Home loans and car loans fall into the secured category because your home or vehicle is held by the bank as collateral. In such cases, if the borrower dies, the bank can sell that property to recover the outstanding amount. Meanwhile, personal loans or credit card balances are unsecured loans because no guarantee is required. In this situation, the bank cannot pressure family members or legal heirs to repay the loan, and such loans are often classified as non-performing assets (NPA).
If there is a co-applicant when taking out a loan, they become fully responsible for repaying the loan after the borrower’s death. The bank first contacts the co-applicant. If there is no co-applicant, the bank turns to the guarantor. Becoming a guarantor means that if the primary borrower is unable to repay the loan, you are guaranteeing repayment on their behalf. Therefore, before becoming a guarantor, it is very important to thoroughly understand their financial situation and the terms of the loan, otherwise you could get into trouble. If there is no co-applicant or guarantor for the loan, the bank contacts the legal heir. However, according to the law, an heir is only liable to repay the loan if they inherit any of the deceased’s assets. The heir’s liability is limited to the value of the inherited property. If the heir does not inherit any assets or refuses to repay the loan, the bank seizes the assets in the case of a secured loan. Nowadays, banks often offer loan protection insurance with larger loans, such as home loans.
A type of term insurance
This is a type of term insurance. If the borrower has taken out this insurance, the insurance company repays the outstanding loan to the bank upon their death, leaving the family without any burden. Therefore, it may be wise to obtain this type of insurance coverage when taking out a larger loan.
