Death is an inevitable part of life, but it’s a topic often avoided. While planning for the end might seem morbid, it’s a responsible step to ensure your loved ones aren’t burdened with unexpected financial responsibilities.
An often-overlooked component of estate planning is your car and its associated loan. Surprisingly, your car loan doesn’t necessarily end when you do. Understanding what happens to your car and loan after your death can help you make informed decisions now to protect your family from unnecessary complications later.
Join us to learn about things that happen to your car and car loan if you suddenly pass away before the loan pay off.
Loan Becomes Part of the Estate
Upon the demise of a car loan borrower, the loan’s outstanding balance is incorporated into the deceased individual’s estate. An estate is a legal entity comprising all the assets and liabilities of a person upon their death. Essentially, the car loan transforms into a financial obligation of the estate. This means it will be considered alongside other debts, like credit cards outstanding, medical bills, and taxes, when the estate is being settled.
Co-Signer or Co-Borrower Liability
A co-signer or co-borrower on a car loan shares equal responsibility for the loan’s repayment with the primary borrower. In the event of the primary borrower’s death, the co-signer or co-borrower becomes solely responsible for continuing the loan payments.
A 2023 Marketwatch Survey revealed that about 30% of people had cosigners added to their auto loans. This underscores the importance of understanding co-signer liability in the event of the primary borrower’s death. A co-signer is equally liable for the loan, regardless of whether they benefited from the car or not. Missed payments can negatively affect their credit score.
Responsibility of the Executor
The executor of an estate is tasked with managing the deceased person’s financial affairs. This includes identifying, valuing, and distributing assets, as well as settling debts. In the context of a car loan, the executor is responsible for determining how to handle the loan. This may involve making loan payments, refinancing the loan, or selling the vehicle to repay the debt. The executor must act in the best interests of the estate and its beneficiaries.
Contacting Lender
Promptly notifying the lender of the borrower’s death is essential. The executor or a surviving family member should contact the lender as soon as possible to provide the necessary documentation, such as a death certificate. This initial contact serves to initiate the process of determining how to proceed with the loan. The lender will typically require verification of the individual’s authority to manage the deceased’s financial affairs, which might include a copy of the will or court appointment documents.
Loan Terms Review
Following the notification of a borrower’s death, the lender will conduct a comprehensive review of the loan terms. This examination encompasses the outstanding principal balance, the applicable interest rate, and the available repayment options. The lender’s goal is to assess the loan’s current status and explore potential resolution avenues, such as loan modification or refinancing. This evaluation is crucial in determining the subsequent steps to be taken by both the lender and the deceased’s estate.
Car as Estate Asset
Upon the borrower’s passing, the vehicle becomes a tangible asset of their estate. As such, it is subject to the probate process, where the estate’s assets and liabilities are identified, valued, and distributed according to the specifics of the deceased’s will or the applicable intestacy laws. The car’s value will be included in the overall estate valuation, and its disposition will be determined by the executor of the estate in accordance with the legal and financial circumstances.
Options for Legal Heirs
The legal heirs of the deceased have several options regarding the car and the associated loan. They may choose to continue making the loan payments and retain ownership of the vehicle. Alternatively, they can opt to sell the car and use the proceeds to pay off the outstanding loan balance. The decision ultimately rests with the heirs and is influenced by factors such as the car’s value, the remaining loan amount, and the overall financial situation of the estate.
Repossession
According to a July 2024 Cox Automotive report, car repossessions have increased by 24% as compared to last year. If the loan payments are not maintained, or if a suitable arrangement cannot be reached between the lender and the estate, the lender may initiate repossession proceedings. This involves reclaiming the vehicle to offset the unpaid debt. It is important to note that repossession can have financial and emotional consequences for the estate and its beneficiaries. To avoid this outcome, timely communication with the lender and proactive steps to address the loan are essential.
Insurance Claim
According to the Insurance Information Institute, 60% of Americans own a life insurance policy. The existence of a life insurance policy on the deceased borrower can significantly impact the handling of the car loan and its potential effect on the family.
Many life insurance policies provide a death benefit where a lump sum payment made to designated beneficiaries upon the insured’s death. This benefit can be utilized to cover the outstanding balance of the car loan, thereby relieving the estate or surviving family members of this financial burden. However, the availability and amount of the death benefit are contingent upon the specific terms of the insurance policy.
Vehicle Title Transfer
Regardless of whether the legal heirs decide to retain ownership of the car or sell it, the transfer of the vehicle title is an essential step in the estate settlement process. The executor of the estate is responsible for initiating the title transfer, which involves obtaining the necessary paperwork, such as the death certificate and the appropriate transfer forms. The new owner, whether an heir or a buyer, has to register the vehicle in their name and get a new title.
Potential Title Issues
Complications can arise in the title transfer process if multiple individuals are listed as owners on the car title. In such cases, determining ownership rights and obtaining the necessary signatures from all co-owners can be challenging. Resolving these issues may require legal intervention to establish clear ownership and facilitate the title transfer.
Issue of Lienholder Rights
It is crucial to remember that the lender maintains specific rights regarding the car until the loan is fully repaid. These rights typically include the requirement to be notified of any sale of the vehicle. The lender may also have the right to approve the sale price or to receive payment directly from the proceeds of the sale. Failure to comply with the lender’s requirements can lead to legal repercussions for the estate or the new owner.