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What Happens to a Car Loan When Someone Dies?

What Happens to a Car Loan When Someone Dies? Understanding the Car Loan Death Clause
Kim Franke-Folstad
Kim Franke-FolstadUpdated March 9, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Probably the last thing on most car buyers’ minds when they walk into a dealership is the thought that they might die before they manage to fully pay off their loan. What happens to a car loan when someone dies is the lender may demand repayment from a surviving spouse or repossess the car.Unexpected deaths occur from time to time, and that’s why auto loan paperwork may contain a death clause that explains what happens to a financed car when the borrower dies. Below we highlight everything that can happen if a car loan borrower dies before paying off the auto loan debt.

What Happens to a Financed Car When Someone Dies?

A car loan is usually a short-term debt. The average car loan length is 69.44 months for new car loans and 68.01 months for used car loans as of the fourth quarter of 2022, according to Experian. Many borrowers may not expect to meet their demise during their loan repayment period, but it does happen. As mentioned above, lenders may demand repayment from a surviving spouse or repossess the vehicle if a car loan borrower dies before repaying the debt in full.

What Is the Car Loan Death Clause?

Lenders rely on the obligations borrowers agree to in their loan documents to help keep transactions on course. The car loan death clause is any language in a car financing contract that reinforces your obligation to repay the debt.A car retail installment sale contract may highlight the merits of obtaining optional credit life insurance. If you buy and maintain credit life insurance on your car loan, the insurance company may pay off your remaining loan balance if you die unexpectedly.

How the Car Loan Death Clause Works

Alive or dead, when a borrower stops making car loan payments, a lender may decide that the unpaid debt is in default.And because a car loan is usually a secured loan, with the car serving as collateral, the lender might move to repossess the vehicle in order to recover its money.But that isn’t the only remedy a lender can or will use when a borrower dies. As long as timely payments continue, there are several scenarios in which the car could remain with a family member or friend — perhaps by transferring the loan to their name or auto refinancing the remaining balance with a new loan.

Who Could End Up Making the Payments? 

Depending on the laws of where you live, several factors can go into deciding who’s responsible for making loan payments after a car owner dies. Here are a few possibilities:

A Co-Borrower or Cosigner

If your name is on a car loan as a co-borrower or cosigner, you can expect the lender to hold you responsible for continuing payments. Liability for the loan falls to you, and you would be expected to pay the principal and any finance charges on the car loan.That means the lender can take steps to recover the money if you fail to make payments on time. If you want to keep the car — and protect your credit — you may have to do a little legwork to take the deceased’s name off the loan and change automatic payments to a different bank account.

A Surviving Spouse in a Community Property State

In community property states, spouses are jointly responsible for any debts they take on after their marriage. So, even if you aren’t a cosigner or co-borrower, the lender could come to you looking for payment.There are at least nine community property states, according to the IRS:
  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin
If you aren’t sure about the status of your spouse’s car loan, you can contact the lender for information.

A Surviving Spouse or Other Beneficiary

A surviving spouse who isn’t in a community property state and whose name isn’t on the car loan isn’t responsible for the loan. So, it may be your choice whether to assume payments if the car goes to you after probate. This is also true for any other beneficiary whose name is not on the loan.Recommended: What Happens to Personal Loans When the Lenders or Borrower Die?

How Does Probate Affect a Financed Car?

Probate is the legal process that may ultimately determine who is responsible for a financed car when the owner dies. Probate is generally the first step in settling an estate’s financial issues. It protects both creditors and beneficiaries. The rules may vary a bit from state to state, but here are some basics:

Assets and Liabilities Are Combined 

When a person dies, their assets and liabilities — everything that makes up their net worth — passes on to their “estate.” That might be a home, investments, a car, and other valuables. Or it might be just a car, a small savings account, and some random possessions. You don’t have to be rich to have an estate. In this context, it just means what you own and what you owe.The court-supervised probate process typically applies only to assets that were solely owned by the deceased at the time of death. If there’s a cosigner or co-borrower on the car loan, remember, the payments would become their responsibility. But if the deceased was the only one named on the loan, the car would likely be a probate asset.

Debts Are Paid and Assets Are Disbursed

The probate court will put an executor or administrator in charge of making sure the estate’s debts are all paid and the assets are disbursed to the appropriate beneficiaries. But working through all of that can take a while, so the executor or administrator may use the estate’s money to pay ongoing bills — including car payments — until the estate is eventually settled.That doesn’t mean the car will automatically go to an heir at the end of the probate process, however. At some point, the executor might find it necessary to liquidate all or some of the estate’s assets to pay off the deceased’s remaining debts (credit cards, bank loans, etc.) And that could include selling the car — especially if it’s worth substantially more than the remaining loan balance.On the other hand, if there is enough money left after other debts are paid, the estate might be able to pay off the car loan in full. If that’s the case, a beneficiary may receive the car at the end of the probate process without having to take on any payments. (The car title can’t be transferred until probate is finished.)Finally, if the car is still available but the estate can’t pay it off, a friend or family member who’s willing to cover the loan balance may be designated as the car’s legal heir. Or, if no one is interested, the estate might just allow the lender to repossess the car. The lender would then sell the car to recover its loss and return any leftover funds to the estate.Recommended: What Happens to a Bank Account When Someone Dies?

Repossession of a Car After Death

It’s unlikely a lender will automatically repossess a car after learning of a borrower’s death. But if the family stops making timely payments — maybe because they can’t afford it or the obligation gets away from them in their grief — the lender may take steps to recover the money it’s owed.

Involuntary Repossession

The lender could decide to repossess the vehicle and put the proceeds toward the outstanding loan balance. And if the sale doesn’t cover the balance, the lender may continue to pursue payment from a co-borrower or cosigner, or from a surviving spouse in a community property state.The lender can’t force the surviving spouse in a non-community property state or other heirs to pay off the remaining debt, but it could choose to file a claim against the estate in probate court.

Voluntary Repossession

Of course, you don’t have to wait for the lender to force the issue. If no one wants to take responsibility for the car — by making the payments or selling it to pay off the loan — the family may ask to have the car picked up through voluntary repossession.

What Are Some Car Loan Payment Options? 

If you learn you’ve inherited a financed car, you may have a few options to consider:

Credit Insurance

If the car’s owner purchased optional credit insurance when he or she signed for the loan, you may not have to make any more payments — even if your name is on the loan. Credit insurance covers all or some of the remaining balance when the borrower dies. 

The Estate Pays Off the Loan

To avoid tension with other beneficiaries, you may want to discuss whether the car loan will be fully repaid along with other debts when the estate is being settled, and how that might affect your overall inheritance.

Refinancing the Loan

If you’re taking over repayment and your name isn’t on the original loan, the lender will likely want you to refinance into a whole new loan. To determine if the cost will fit your budget, you may want to compare refi loans on an online site like Lantern and see what interest rate and payment you might qualify for.If your credit is a little shaky, it might help to enlist a cosigner with good credit to improve your chances of getting a better interest rate.

Sell the Car to Repay the Loan

Do you even need this car? If you thought you wanted the car, then changed your mind, It may make sense to sell the car to repay the loan. Selling the car may be right for you if the resale value is greater than the outstanding auto loan balance.

How to Assume a Car Loan After the Owner Dies

If your name isn’t on the existing auto loan but you want to legally take possession of a vehicle after the owner’s death, there are a few steps you can follow to make sure things stay on track.

Be Sure the Lender Gets a Copy of the Death Certificate

If the car is part of the deceased’s estate, the executor generally will take care of this step. If that isn’t you, you may want to follow up to be sure the lender knows the car owner died, but payments will continue.

Find Out If Someone Is Making Payments

If loan payments stop, even temporarily, the lender could decide to repossess the car. Check with the loan’s cosigner or co-borrower, the estate’s executor, or anyone else who might be covering the payments to ensure the loan is up to date. Or contact the lender about making payments.

Transfer the Title

If you’ll be taking over responsibility for paying for the car, it’s a good idea to have the car transferred to your name as soon as possible — and the lender may require it. Once you’re sure the car is legally yours, you can contact your state’s Department of Motor Vehicles for information about the documents you’ll need and the fees you’ll have to pay.

Contact Your Insurance Agent

Don’t forget to add the car to your auto insurance policy as soon as possible. Your agent can help you determine what coverage is required, or you can research and shop for a new policy online.

Find the Best Way to Pay for the Car 

Unless the owner purchased credit insurance or the estate pays off the car, you’ll likely have to find a way to cover the cost. Even if the lender will allow you to take over the car loan, you may want to consider other options.If the balance owed isn’t too high, you could decide to simply pay off the entire loan amount.Or you might want to refinance to secure a new loan with a lower interest rate or lower monthly payment. Refinancing a car loan with a 650 credit score is possible.

The Takeaway

Auto loan debts generally need to be repaid even if the borrower dies with an outstanding balance. Lenders have no obligation to forgive the unpaid debt, and they may have the right to repossess the vehicle. Anyone who inherits a deceased borrower’s car loan debt may have the option of refinancing for a lower monthly payment.If you’re looking to refinance your car loan, Lantern by SoFi can help. Simply by filling out one online form, you’ll be able to compare auto refinancing options from multiple lenders.Find and compare auto loan refinance options with Lantern.

Frequently Asked Questions

What happens to a car loan if the borrower dies?
Are you responsible for loan payments if you inherit a financed car?
Who pays the car loan if the borrower dies unexpectedly?
Photo credit: iStock/nortonrsx
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About the Author

Kim Franke-Folstad

Kim Franke-Folstad

Kim Franke-Folstad is an award-winning journalist with 30 years of experience writing and editing for newspapers, magazines and websites. Her work for SoFi covers a range of topics related to personal finance, including budgeting, saving, borrowing, and investing.
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