Probably the last thing on most car buyers’ minds when they walk into a dealership is the thought that they might die before they manage to fully pay off their loan.
A car loan is usually a short-term debt. The average new car loan runs about six years — and few of us expect to meet our demise in that amount of time.
But it does happen. Which is why auto loan paperwork typically contains a section, referred to as the death clause, that explains what happens to a financed car when the borrower dies. And it warns that the loan won’t simply be forgiven.
Related: Does loan purpose matter?
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What Is the Car Loan Death Clause?
Lenders rely on the obligations borrowers agree to in their loan documents to help keep transactions on course. The death clause portion of car loan paperwork clarifies the steps a lender can take to ensure the loan is repaid if the borrower dies.
Alive or dead, when a borrower stops making payments, a lender may decide their loan is in default. And because a car loan is usually a secured loan, with the car serving as collateral, the lender might move to repossess the vehicle in order to recover its money.
But that isn’t the only remedy a lender can or will use when a borrower dies. As long as timely payments continue, there are several scenarios in which the car could remain with a family member or friend, perhaps by transferring the loan to their name or refinancing the remaining balance with a new loan.
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Who Could End Up Making the Payments?
Depending on the laws where you live, several factors can go into deciding who’s responsible for making loan payments after a car owner dies. Here are a few possibilities:
1. A Co-Borrower or Cosigner
If your name is on a car loan as a co-borrower or cosigner, you can expect the lender to hold you responsible for continuing payments. Liability for the loan falls to you. That means the lender can take steps to recover the money if you fail to make payments on time. If you want to keep the car and protect your credit, you may have to do a little legwork to take the deceased’s name off the loan and/or change automatic payments to a different bank account.
2. A Surviving Spouse in a Community Property State
In community property states, spouses are jointly responsible for any debts they take on after their marriage. So, even if you aren’t a cosigner or co-borrower, the lender could come to you looking for payment. There are currently nine community property states:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
If you aren’t sure about the status of your spouse’s car loan, you can contact the lender for information.
3. A Surviving Spouse or Other Beneficiary
A surviving spouse who isn’t in a community property state and whose name isn’t on the car loan isn’t responsible for the loan. So, it may be your choice whether to assume payments if the car goes to you after probate. This is also true for any other beneficiary whose name is not on the loan.
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How Does Probate Affect a Financed Car?
The car loan death clause is the lender’s way of providing information about potential repayment and ownership options. But probate is the legal process that may ultimately determine who is responsible for a financed car when the owner dies.
Probate is generally the first step in settling an estate’s financial issues. It protects both creditors and beneficiaries. The rules may vary a bit from state to state, but here are some basics.
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1. Assets and Liabilities Are Combined
When a person dies, their assets and liabilities — everything that makes up their net worth — passes on to their “estate.” That might be a home, investments, a car and other valuables. Or it might be just a car, a small savings account and some random possessions. You don’t have to be rich to have an estate. In this context, it just means what you own and what you owe.
The court-supervised probate process typically applies only to assets that were solely owned by the deceased at the time of death. If there’s a cosigner or co-borrower on the car loan, remember, the payments would become their responsibility. But if the deceased was the only one named on the loan, the car would likely be a probate asset.
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2. Debts Are Paid and Assets Are Disbursed
The probate court will put an executor or administrator in charge of making sure the estate’s debts are all paid and the assets are disbursed to the appropriate beneficiaries. But working through all that can take a while, so the executor or administrator may use the estate’s money to pay ongoing bills — including car payments — until the estate is eventually settled.
That doesn’t mean the car will automatically go to an heir at the end of the probate process, however. At some point, the executor might find it necessary to liquidate all or some of the estate’s assets to pay off the deceased’s remaining debts (credit cards, bank loans, etc.) And that could include selling the car, especially if it’s worth substantially more than the remaining loan balance.
On the other hand, if there is enough money left after other debts are paid, the estate might be able to pay off the car loan in full. If that’s the case, a beneficiary may receive the car at the end of the probate process without having to take on any payments. (The title can’t be transferred until probate is finished.)
Finally, if the car is still available but the estate can’t pay it off, a friend or family member who’s willing to cover the loan balance may be designated as the car’s legal heir. Or if no one is interested, the estate might just allow the lender to repossess the car. The lender would then sell the car to recover its loss and return any leftover funds to the estate.
Image Credit: DepositPhotos.com.
Repossession of a Car After Death
It’s unlikely a lender will automatically repossess a car after learning of a borrower’s death. But if the family stops making timely payments — maybe because they can’t afford it or the obligation gets away from them in their grief — the lender may take steps to recover the money it’s owed:
- Involuntary Repossession: The lender could decide to repossess the vehicle and put the proceeds toward the outstanding loan balance. And if the sale doesn’t cover the balance, the lender may continue to pursue payment from a co-borrower or cosigner, or from a surviving spouse in a community property state. The lender can’t force the surviving spouse in a non-community property state or other heirs to pay off the remaining debt, but it could choose to file a claim against the estate in probate court.
- Voluntary Repossession: Of course, you don’t have to wait for the lender to force the issue. If no one wants to take responsibility for the car — by making the payments or selling it to pay off the loan — the family may ask to have the car picked up through voluntary repossession.
Image Credit: DepositPhotos.com.
What Are Some Car Loan Payment Options?
If you learn you’ve inherited a financed car, you have a few options to consider:
- Credit Insurance: If the car’s owner purchased optional credit insurance when he or she signed for the loan, you may not have to make any more payments — even if your name is on the loan. Credit insurance covers all or some of the remaining balance when the borrower dies.
- The Estate Pays Off the Loan: To avoid tension with other beneficiaries, you may want to discuss whether the car loan will be fully repaid along with other debts when the estate is being settled, and how that might affect your overall inheritance.
- Refinancing the Loan: If you’re taking over repayment and your name isn’t on the original loan, the lender will likely want you to refinance into a whole new loan. To determine if the cost will fit your budget, you may want to compare refi loans on an online site like Lantern and see what interest rate and payment you might qualify for. If your credit is a little shaky, it might help to enlist a cosigner with good credit to improve your chances of getting a better interest rate.
- Sell the Car to Repay the Loan: Do you even need this car? If you thought you wanted the car, then changed your mind, it may make sense to sell it, repay the loan, and pocket the difference.
Image Credit: Sakkawokkie/ istockphoto.
How to Assume a Car Loan After the Owner Dies
If your name isn’t on the existing auto loan but you want to legally take possession of a vehicle after the owner’s death, there are a few steps you can follow to make sure things stay on track.
Image Credit: istockphoto.
1. Be Sure the Lender Gets a Copy of the Death Certificate
If the car is part of the deceased’s estate, the executor generally will take care of this step. If that isn’t you, you may want to follow up to be sure the lender knows the car owner died, but payments will continue.
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2. Find Out If Someone Is Making Payments
If loan payments stop, even temporarily, the lender could decide to repossess the car. Check with the loan’s cosigner or co-borrower, the estate’s executor, or anyone else who might be covering the payments to ensure the loan is up to date. Or contact the lender about making payments.
Image Credit: DepositPhotos.com.
3. Transfer the Title
If you’ll be taking over responsibility for paying for the car, it’s a good idea to have the car transferred to your name as soon as possible — and the lender may require it. Once you’re sure the car is legally yours, you can contact your state’s Department of Motor Vehicles for information about the documents you’ll need and the fees you’ll have to pay.
Image Credit: DepositPhotos.com.
4. Contact Your Insurance Agent
Don’t forget to add the car to your auto insurance policy as soon as possible. Your agent can help you determine what coverage is required, or you can research and shop for a new policy online.
Image Credit: Drazen Zigic/istockphoto.
5. Find the Best Way to Pay for the Car
Unless the owner purchased credit insurance or the estate pays off the car, you’ll likely have to find a way to cover the cost. Even if the lender will allow you to take over the original car loan, you may want to consider other options.
If the balance owed isn’t too high, you could decide to simply pay off the entire loan amount. Or you might want to refinance to secure a new loan with a lower interest rate or better terms.
Image Credit: DepositPhotos.com.
The Takeaway
When an owner of a financed car dies, the loan doesn’t disappear. And, unfortunately, deciding who can legally inherit the car and/or assume the loan payments can sometimes take months or longer. Meanwhile, unless the owner purchased credit insurance, the lender will expect the monthly payments to continue, or it may repossess the vehicle.
If you expect to inherit a financed car and you hope to keep it, you may want to do some research into the probate process to be sure things go as smoothly as possible. If you think you’ll be making payments, this also may be a good time to look at your refinancing options, so you can be sure you’re getting the best loan possible.
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