Think back to your last car purchase. What were you thinking about? You probably focused on how shiny it was or the practical value the new car would add to your workday or leisure time.
But have you thought about what you’d do if the unthinkable happens? People do die with car loans in effect, so it’s important to understand what happens in this context.
Car loan liability may become a concern if you or a loved one dies with car loan debt — it usually comes to a head as the estate settles. There are contexts in which the car loan may pass to someone else, but more often, the car loan will be settled out of your estate or it will go unpaid. If the loan goes unpaid, At this point, the car loan lender may take a loss or repossess the car.
Jump ahead to these sections:
- What Happens to the Car Loan When the Owner Dies?
- How to Assume a Car Loan After Someone’s Death
- What if You Can’t Afford to Take Over the Loan?
- Understand the Car Loan Death Clause Variation
Once you become the heir of a person with a car loan, you’ll need to make decisions based on what you wish to happen to the car — and the debt.
You’ll need to keep a few considerations top of mind when you make your estate planning checklist. You can help ease the car loan transition for your beneficiaries if you think about what will happen when you die.
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What Happens to the Car Loan When the Owner Dies?
Your estate includes all the assets you own (that are not held in trust) and any outstanding debts when you die. The estate is responsible for paying your debts if the total assets are greater than the total debts. Anything that remains goes to the designated beneficiaries through a court process called probate.
Probate is the court process that handles giving your assets to your beneficiaries. Probate involves legal fees — and there are a variety of ways that people avoid having assets and debts go through probate. You can set up trusts and create direct beneficiaries or “payable on death” accounts, depending on the asset.
Your loans are still active when you die, and the lender still will work to receive payment. The estate, however, is the primary “responsible party,” since your assets in life are the first place where the lender should go to get paid.
Let’s say the assets in the estate don’t pay for the car. The car is still an asset itself and may have been bequeathed to someone in the will. This is a double-edged sword — the beneficiary who receives the car may not have the money to keep up the payments on the loan.
Cosigners on car loans become responsible for the car loan after the death of their fellow cosigner. The same is true for situations where two people buy a car together. When one dies, the other becomes the sole owner by default — without going through the probate process.
For the sake of making this easier to understand, let’s assume that you are in a position to assume a car loan after a person’s death. Potential complications could show up along the way. This is especially true if there is anything unusual in the purchase or loan agreement.
How to Assume a Car Loan After Someone’s Death
There are several ways to assume a car loan after a loved one’s death, whether you’re the spouse or a family member. Here’s how to do it.
Step 1: Send a death certificate to the lender
Lenders need to know about the death of the car owner as soon as possible. Sending the death certificate may trigger the lender to send you specific loan paperwork. Each lender handles this differently.
The executor or administrator of the estate should have multiple copies of the death certificate and the certificate can help begin positive communication between the estate and the lender.
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Step 2: Keep making payments
One of the best ways to avoid issues with a car loan after death is to make sure someone continues making payments on time.
Friends and family members who want to be helpful during this time might be able to extend a hand by putting together some payment reminders. They can also help you through phone calls and any paperwork that lenders send you.
Most car loans are secured, which means the lender might attempt to repossess the car if you’re not making payments on it. Continue to make payments so you don’t default on the loan and trigger a potential repossession. Your ultimate goal might be to sell the car, but no matter what, it’s best to avoid repossession.
To be clear here, the estate (by way of the executor or administrator of the estate) is responsible for making the car payments while the probate process is ongoing. The beneficiary (the one ultimately receiving the car) should not make any payments until the estate has officially transferred the car to the beneficiary.
While probate is pending, the estate may decide to sell the car to pay other debts - you as the beneficiary don’t want to find out you’ve been making the monthly payments on a car you’ll never receive.
Clear communication between the executor or administrator and the beneficiary is essential to avoiding confusion and making sure the payments are made properly.
Step 3: Verify credit life insurance or the estate’s ability to pay down the loan
You may learn more about your deceased loved one’s overall financial picture as the estate settles. The owner of the car may have purchased credit life insurance on the car loan.
This insurance offers a death benefit that helps pay off a car loan when someone dies. If you find out there was credit life insurance on the car loan, tell the administrator or executor of the estate right away.
Another possibility is that the car loan could be paid out of the estate. As you might recall, estates include all the assets and all the debts someone has at the point of death.
If the estate contains more assets than debts, it’s possible to use some of the liquid assets (readily available money) to pay off the car loan. This will depend on the provisions of the will, if any, and decisions by the executor or administrator of the estate.
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Step 4: Refinance the loan if necessary
Sometimes the estate may not be enough to pay all debts, including the car loan. You may want to refinance for more favorable terms before you assume full responsibility for the loan. This may include an entirely new loan, but knowing what your options are may help you to afford the new monthly payments.
What if You Can’t Afford to Take Over the Loan?
You may still find yourself liable if you’re a spouse or cosigner and you cannot afford to take over the loan. The lender is likely to repossess the car in order to resell it and recoup its losses on the loan if you fail to pay. The main reason you may not be eager to do this is that your credit could suffer, particularly if you’re a cosigner.
You might also want to avoid it because you might be able to make back some of the previous owner’s investment in the car by selling the car yourself. If the lender sells it at auction for less than it’s worth, you could end up with nothing.
You’re off the hook if you can’t afford the loan and aren’t liable for the loan. Non-spouse family members and other beneficiaries of the estate who aren’t cosigners on the loan cannot be forced to assume the loan.
In that case, the estate may decide to sell the car to pay off the car loan. Depending on your state and other provisions of the will, you may be entitled to any extra proceeds from the sale of the car after paying off the car loan.
It may be a good idea to talk with every heir and make sure that they aren’t interested; just because it would be too much of a liability for you doesn’t mean that there isn’t someone in the family who could use it and could assume the payments.
Lenders may be rather persistent, so it’s important to know your rights. Lenders may make contact when you have no interest in assuming responsibility for the car loan.
Just direct the lenders to the administrator or executor of the estate and request not to be contacted again — be sure you know your rights under the Fair Debt Collection Practices Act (FDCPA). The company may take steps to repossess the car but they aren’t allowed to indefinitely call you if you’ve asked for the calls to stop.
Post-planning tip: If you are the executor for a deceased loved one, handling their unfinished business can be overwhelming without a way to organize your process. We have a post-loss checklist that will help you ensure that your loved one's family, estate, and other affairs are taken care of.
Understand the Car Loan Death Clause Variation
Each car loan is a little different, and the decision really depends on the situation. If your loved one bought a car a few months ago and has basically just driven it off the lot, the payments may be too high to justify the value the heirs can get from it.
On the other hand, even a high payment may be worth considering if the car loan is only a few months from being paid off. Not all car loans are created equal, and there is a good chance that the context will determine which choices you make.
That being said, you won’t be able to keep the car and avoid paying off the car loan at the same time. You’ll need to figure out which direction you want to go if you find yourself in that situation.
Think about this, too: Many cars have a lot of equity built up, so it might not be the best move to allow the lender to repossess the car.
The best path forward might be to allow someone in the family or beneficiaries of the estate to handle the payments and then sell it themselves.
Be sure to prep your own future beneficiaries for a car loan that may not be paid off when you die. It’s important to understand how loans will affect your descendants as you work on your estate planning. You can buy credit life insurance or designate some liquid funds to help your beneficiaries make the first few car payments.
Lastly, think carefully about whether you want to get a cosigner or co-owner on any car loan. That person should know how he or she would handle the entire burden of the car loan alone.
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