What Happens to a Car Loan After Someone Dies?
How a car loan is handled after someone passes away can vary depending on the state of the will and the estate.
When a loved one passes, the people they leave behind typically have to navigate their grief while also settling the deceased's estate. There can be a lot of tricky situations to manage, especially when it comes to financial considerations. For instance, if someone had debt when they passed—like a car loan—it can be confusing to know how to proceed.
We've got you covered. Here's what happens to a car loan when someone dies.
How a Car Loan Is Handled After the Owner's Passing
When someone dies while they still have debt, that debt still exists. The difference is that once the owner of the debt passes, that debt belongs to their estate.
An estate is made up of all the assets the deceased had and their debts, such as auto loan debt. Their checking account, savings, investments, property, and any businesses they own or have a controlling interest in also contribute to their estate. So do their outstanding loans.
The estate will need to pay off as much debt as it can. In some cases, the estate won't have enough assets to pay off all debts. Whoever is in charge of executing the deceased's estate will need to attempt to pay off all of these debts using the estate assets or as much as the estate can manage. Oftentimes, the will names an executor, but a probate court will assign an administrator if the deceased didn't have a will. This person is most likely to be their spouse, child, or sibling.
Understanding the Car Loan Death Clause
If payments are missed on the auto loan, the lender can consider the loan in default. Auto loans are typically secured loans with the car acting as collateral. Because of this, the lender may choose to repossess the car to make up for its losses.
Alternatively, if a surviving family member or friend chooses to keep making payments on the car, the lender may be willing to transfer the loan to their name or refinance the loan into a new one.
How a Co-Signer Affects How a Car Loan Is Handled
If the deceased has a co-signer on the auto loan, then the co-signer (as long as they're still living) will be held responsible for paying off the remaining balance of the loan that wasn't covered by the deceased's estate assets. When someone co-signs on a loan, they agree to make the payments if the other person can't. Even if they aren't the ones to inherit the car, they can still be responsible for making payments on the loan.
In most states, the estate and surviving auto loan co-signers are the ones held responsible for paying off the remaining auto loan balance. If there are no co-signers on the loan and the estate can't pay it off, a surviving spouse, relatives, or other beneficiaries won't be responsible for paying off the debt.
Remember that even if the car was left to an individual in the will, the lender can still repossess it if the loan payments aren't made. If the owner of the car didn't create a will that indicated who the car would pass on to, the probate court will decide who the car belongs to.
These rules may differ by state probate laws, so it can help to consult an estate attorney if you aren't sure about your state's process.
The Bottom Line
With this understanding of what happens to a car loan when someone dies, you can be better positioned to respond after the passing of a loved one and work to put plans in place for your own purposes. Ultimately, an outstanding loan will need repayment one way or another. However, there are several variables to consider and many situations are unique, so carefully weighing all options is crucial.