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What Happens To A Car Loan When Someone Dies? – Forbes Advisor

although no one wants to think about dying, anything can happen. And sadly, if you get a car loan and die before paying it off, the loan doesn’t just go away.

If you’re wondering what happens to a car loan when someone dies, here’s what you need to know.

Reading: Death insurance on car loan

what happens to a car loan if the car owner dies?

If someone dies before paying off an auto loan, the loan will generally become part of the decedent’s estate, which includes all of that person’s assets as well as any outstanding debt. the executor of the estate is responsible for paying these debts out of available assets. after this, whatever is left will be distributed to the beneficiaries through probate, a court process that reviews the decedent’s will and makes sure it is carried out.

However, if the car loan has a co-signer or co-borrower (such as a surviving spouse), the car and its payments will be that person’s responsibility.

car loan death clause

Car loan agreements typically include a death clause that covers what the payment process will look like if the borrower dies. this clause generally explains that if there is a co-signer, the payments will be that person’s responsibility, but if not, the payments will go to the decedent’s estate.

There are also some lenders that require the car to be refinanced if the primary borrower dies. Also, if the loan is secured by the vehicle, as most auto loans are, then the lender could repossess the car if the payments don’t follow through. The exact terms of the death clause will vary depending on the lender and the laws of the lender’s state.

community property states

The laws surrounding debt after someone dies are different in community property states. There are nine of these states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska also adheres to community property laws in some situations.

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In these states, property or assets acquired or loans originated by one spouse during the marriage become jointly owned and are the responsibility of both spouses. This means that if a spouse dies with an outstanding car loan, the remaining spouse will generally be required to pay some or all of the remaining debt. For example, if one spouse owes $20,000 on a car loan, the other spouse will be responsible for $10,000 of that debt, even if that spouse was never listed on the car loan or title.

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However, these rules do not apply if the car loan was obtained before the spouses were married. only debts incurred during the marriage will be affected by community property laws. responsibility can also be changed if the spouses decide to sign a prenuptial or postnuptial agreement that states that their debts and income will be handled separately.

what to do if a car owner dies

If the owner of a car with an outstanding loan is deceased, follow these steps:

1. contact the lender

The first thing you should do is contact the lender and let them know that the primary borrower on the loan is deceased. Be prepared to provide a death certificate for your records.

The lender should explain what needs to happen with the loan, such as contacting a co-signer. They may also provide loan-specific documentation detailing monthly payments, time remaining on the loan term, and payoff amount, depending on the lender’s policies.

2. find out who will make the payments

Who is responsible for making payments on an outstanding auto loan will depend on your specific situation.

  • A co-borrower or co-borrower: If there is a co-borrower or co-borrower on the loan, they will be responsible for repayment.
  • A spouse in a Community Property Status: If you are a surviving spouse in a community property state, you may be responsible for some or all of the remaining balance on your deceased spouse’s auto loan.
  • The Decedent’s Estate: If the deceased person did not live in a community property estate, the unpaid debt will fall to their estate. The executor of the estate (or someone appointed by the court if an executor was not chosen before the borrower’s death) will handle the probate process, including collecting and possibly selling assets to pay off outstanding debts.
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make sure someone continues to pay the loan, or you could risk the lender repossessing the car.

3. transfer the title and register the car

If there is a co-borrower with joint ownership of the car, they will assume the vehicle, its title, and the loan after the death of the owner. but if not, who takes possession of the car will be decided during the probate. If the primary borrower dies without marrying or having children, his assets will generally go to his surviving parents (or his siblings if his parents are also deceased). Please note that car title cannot be transferred until probate is complete.

To continue with the transfer process, the executor will need the following:

  • Testamentary court order allowing transfer of vehicle
  • Current vehicle title
  • Death certificate of previous owner
  • Property disclosure statement odometer
  • transfer fee

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If the car is not included in the succession, the co-owner or heir of the vehicle may make the transfer. To do so, they’ll need to take the car’s title and previous owner’s death certificate to the local Department of Motor Vehicles (DMV). if the person assuming ownership is not the beneficiary, they may also need to provide an affidavit.

4. insure the car

If you’re going to take ownership of the car, you’ll also need to purchase auto insurance. If you already have insurance for another car, you can contact your agent to see what type of coverage you’ll need.

options to pay off the car loan

If you’ve inherited a car with an outstanding loan, here are some possible options to consider:

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the inheritance pays the loan

In some cases, it might be easier to simply have the estate pay off the car loan, or possibly even have the estate sell the car to help cover outstanding debt. be sure to discuss it with the other beneficiaries of the estate to help avoid tensions.

pay the loan through credit life insurance

When someone takes out an auto loan, they often have the option of adding credit life insurance to their loan, which will cover their remaining payments if they die. If you discover that the deceased purchased credit life insurance, the policy may pay some or all of the outstanding balance.

refinance the car

If you end up taking responsibility for a car but your name isn’t on the loan, the lender will likely ask you to refinance the car in their name. Depending on your credit, you may qualify for a lower rate through refinancing, which could save you money on interest and potentially help you pay off the loan faster.

Before you refinance, it’s a good idea to shop around and compare your options not only from the original lender but from as many lenders as possible. this can help you find a good deal more easily.

Note that you will generally need a good to excellent credit history to be approved for refinancing; a good credit score is generally considered to be 670 or higher. If you are having difficulty qualifying, you might consider applying with a co-signer to improve your chances of approval. A co-signer can be anyone, such as a parent, other relative, or trusted friend, who has good credit and is willing to share responsibility for the loan.

sell the car

Depending on your situation and the condition of the vehicle, you may decide to sell it. keep in mind that you’ll need to make enough from the sale to cover the remaining loan balance, or you’ll have to pay it yourself.

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