What Happens to Your Car Loan When Your Cosigner is Deceased?
It is a difficult time when loved ones and friends pass away, and unfortunately money matters can make things worse; however, it is vital to address them and make sure that you understand unpaid debts and where they fall. If the deceased individual was a cosigner on your car loan, what does that mean for you and how do you handle what comes next?
Why Have A Co-Signer on Your Car Loan?
If you're like most people and cannot pay for a new car in full, you will definitely need to take out a car loan. Credit is vital when considering a car loan, and if your credit isnít up to snuff you will likely have a very difficult time buying a carówhich is where a cosigner comes in. A cosigner is someone with a responsible borrowing history who can serve as a chaperone to your own borrowing. When you have a co-signer on a car loan, they become the liable backup to pay the debt if you default on payments.
The Successor Clause
It ís important to read the fine print of your car loan agreement, and in it you will likely find a section known as a successor clause which outlines that, in the event of the cosignerís death, the debt will be bound to the cosignerís estate. Now, this doesnít really affect the borrower, and so long he or she continues to make the payments on the car responsibly, nothing will be amiss. In the event that the loan is defaulted on, however, then the bank has the right to pursue funds from the deceasedís estate, which would pay all outstanding debts before distributing funds to beneficiaries. If the estate cannot pay off the debt, it is unlikely it will then transfer to a legal heir, but it is possible. Regardless, surviving family members will probably not be very happy with the adjustment to the will once the estate has been ransacked.
It ís important to note that not all loan agreements involve a successor clause and that in the event of a cosignerís death the liability will end with their passing, thereby falling entirely on the borrower. So again, make sure that you have thoroughly read your loan contract before signing, or co-signing.
Changes to Your Car Loan Agreement
Your cosigner is your silent partner on your car loan, and with that person, you were able to take out a loan with an interest rate and timetable associated with your co-signers credit score. When your cosigner dies, however, things can become tricky within the terms of your car loan, meaning that they might be subject to change in accordance with whatever your credit score is. The interest rate might grow on your loan, and the timetable might be altered, which can make paying your car loan back far more difficult and costly. Again, read carefully through the fine print of your car loan agreement to ensure you understand what might be at risk if this situation arises.
What if the Borrower is Deceased?
Now letís discuss the reverse: the borrower on the loan has unfortunately passed away, but you are the surviving cosigner. If there is still money owed on the car loan, what does that mean for you? First off, the borrowerís estate will be responsible for paying off what is left of the debt before any of it is turned to your direction. If the estate cannot fully pay off what is owed, then your responsibility will be to pay off the funds remaining. Itís important to note that any surviving relatives who are not cosigners should not be responsible for paying off the debtóat least, in most states. There are nine states, called community property states, where the laws are a little messier for spouses of the deceased. These states include Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin.
A community property state means that any property or assets purchased by a spouse during a marriage, including any loans taken out, are jointly owned by the other spouse. So let's say a car loan was taken out here in Idaho by a wife who has died and owes $12,000 on a car loan. Her surviving husband would owe $6,000 of the remaining balance, even if his name was not on the loan itself.
Unsecured and Secured Car Loans
Itís also important to know if the car loan is secured or unsecured. An unsecured loan has no collateral. This means that, in the event of the death of the borrower, it is simply the responsibility of the estate or the cosigner to pay off the remaining balance for the car loan and the car cannot be repossessed. A secured loan, on the other hand, means that there is collateral and the car can be repossessed to pay off the outstanding debt, or at the very least a portion of it. The remaining balance would be subject to the estate and cosigner.
Keeping the Car and the Car Loan
If the borrower has passed but the car is passed on to an heir included in the estate, then becomes the problem of whether or not that heir wants to keep the car, including the loan that comes attached to it. If you are said heir and decide to keep the car, then you will have to get a title transfer to yourself, pay any state registration, and take out new auto insurance. After all that is done, it is time to deal with whatís left of the loan.
It might not be a bad idea to try refinancing the loan, especially if you have better credit than what the previous owner had. You should take a seat in front of your computer, calculate your credit score, take a look at your savings and income, and do the math to see if first and foremost you can apply to refinance the auto loan. After reviewing the loan agreement, if the fees do not outweigh the benefits of refinancing, then first and foremost attempt to refinance for a shorter term at a lower interestóthatís where youíll save the most money. Finding an alternate installment loan that provides a better payment plan is important, so make sure you do your research and find a credible lender.
While that is the optimal situation, you can, of course, utilize the refinancing to better manage your monthly expenditure. While you certainly wonít save as much money in the long-term, it will at the very least make your life easier in the interim.
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As you can see, the ease with which this process can be handled is nearly entirely decided by how responsible the parties involved are. Cosigning on a loan can be messy is the borrower doesnít pay his or her bills on time, so use your best judgment before signing yourself up to be one; otherwise, should the worst happen, it could prove detrimental to your family in your absence. Similarly, if the worst happens to the borrower, youíll be left with the financial strain of their loan. Be careful, and make sure you can handle the responsibility if you cosign on a car loan.
Note: The content provided in this article is only for informational purposes, and you should contact your financial advisor about your specific financial situation.