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Although no one wants to think about dying, anything can happen. And unfortunately, if you take out an auto loan and die before you pay it off, the loan doesn’t just disappear.
If you’re wondering what happens to a car loan when someone dies, here’s what you need to know.
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What happens to an auto loan if a car owner dies?
If someone dies before repaying an auto loan, the loan will usually become part of the deceased’s estate, which includes all of that person’s assets as well as any unpaid debts. The executor is responsible for repaying these debts with available assets. After that, whatever remains will be distributed to beneficiaries by probate, a court process that analyzes the deceased’s will and ensures it is executed.
However, if the car loan has a co-signer or co-borrower (such as a surviving spouse), the car and its payments will become that person’s responsibility.
Car loan death clause
Auto loan agreements typically include a death clause that covers what the repayment process will look like if the borrower dies. This clause usually explains that if there is a co-signer, the payments will be made by that person, but if not, the payments will go to the estate of the deceased.
Some lenders also require the car to be refinanced if the primary borrower dies. Additionally, if the loan is secured by the vehicle, as most auto loans are, the car could be repossessed by the lender if payments do not continue. The exact terms of the death clause vary depending on the lender as well as your state’s laws.
Community property states
The laws surrounding debt after a person dies are different in community property states. These states are nine in number: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska also adheres to community property laws in certain situations.
In these states, property or assets acquired or loans taken out by one of the spouses during the marriage become joint property and are the responsibility of both spouses. This means that if one spouse dies with an outstanding car loan, the remaining spouse will usually have to pay off some or all of the remaining debt. For example, if one spouse owes $20,000 on a car loan, the other will be responsible for $10,000 of that debt, even if that spouse was never registered on the loan or the car title.
However, these rules do not apply if the car loan was taken out before the marriage of the spouses. Only debts incurred during a marriage will be impacted by community property laws. Liability can also be changed if the spouses decide to sign a prenuptial or postnuptial agreement stating that their debt and income will be treated separately.
What to do if a car owner dies
If the owner of a car with an outstanding loan has died, follow these steps:
1. Contact the lender
The first thing to do is to contact the lender and let them know that the main borrower of the loan has passed away. Be prepared to provide a death certificate for their records.
The lender should explain to you what needs to happen with the loan, such as contacting a co-signer. They might also be able to provide specific loan documents detailing monthly payments, time remaining on the loan term, and repayment amount, depending on the lender’s policies.
2. Determine who will make the payments
Who is responsible for making payments on an outstanding auto loan will depend on your specific situation.
- A co-signer or co-borrower: If there is a co-signer or co-borrower on the loan, the responsibility for repayment will fall to them.
- A spouse in a common property state: If you are a surviving spouse in a community property state, you may be responsible for all or part of the remaining balance on your late spouse’s car loan.
- Estate of the deceased: If the deceased was not living in a community property state, their unpaid debt will revert to their estate. The estate’s executor (or someone appointed by the court if an executor has not been chosen before the borrower’s death) will handle the probate process, which includes collecting and possibly selling assets to repay outstanding debts.
Make sure someone keeps paying the loan, otherwise you risk having the car repossessed by the lender.
3. Transfer the title and register the car
If there is a co-borrower with the joint ownership of the car, he will assume the vehicle, its title and the loan after the death of the owner. But otherwise, who becomes the owner of the car will be decided during homologation. If the primary borrower dies without marrying or having children, their assets will generally go to their surviving parents (or siblings if their parents are also deceased). Keep in mind that title to the car cannot be transferred until probate is complete.
To proceed with the transfer process, the executor will need the following:
- Probate court order authorizing transfer of vehicle
- Current vehicle title
- Death certificate of the previous owner
- Odometer Disclosure Statement
- Transfer fee
If the car is not included in the homologation, the co-owner or the heir of the vehicle can carry out the transfer. To do this, they will need to take the car’s title and the previous owner’s death certificate to their 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 become the owner of the car, you will also need to take out insurance for the vehicle. If you already have insurance on another car, you can contact your agent to see what type of coverage you will need.
Options for repaying the car loan
If you inherited a car with an outstanding loan, here are some potential options to consider:
The estate repays the loan
In some cases, it may be easier to simply have the car loan paid off by the estate, or perhaps even have the car sold by the estate to help cover the outstanding debt. Be sure to discuss this with the other beneficiaries of the estate to avoid any tension.
Repay the loan through credit life insurance
When someone takes out a car loan, they often have the option of adding creditor insurance to their loan, which will cover their remaining payments in the event of their death. If you find that the deceased person has taken out creditor insurance, the policy could reimburse part 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 your 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 refinancing, it’s a good idea to shop around and compare your options not just with the original lender, but with as many lenders as possible. This can help you find a good deal more easily.
Keep in mind that you will generally need good to excellent credit to get approved for refinancing – a good credit score is generally considered to be 670 or higher. If you are struggling to qualify, you may 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 the responsibility for the loan.
Sell the car
Depending on your situation and the condition of the vehicle, you could decide to sell it. Keep in mind that you will need to earn enough from the sale to cover the remaining balance of the loan, otherwise you will be forced to pay it back yourself.