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What happens to a car loan when the owner dies?
You're almost never responsible for debt you didn't sign up for — unless you're a spouse.
4 things that happen to a car loan when the owner dies
In most cases, your relative’s car loan goes through the following four stages after they die.
1. It gets combined with other assets and debts in the estate.
After anyone dies, all of their assets and debts are combined into what is called their estate. The estate represents the deceased’s net worth after death.
2. It goes into probate.
Once the estate is established, the deceased’s assets go through a legal process called probate. Probate involves distributing the assets and paying off debts that the deceased left behind.
If the deceased had an estate plan, it should name an executor — someone who handles paying off their debts and distributing assets according to their will. Otherwise, a probate court names an administrator who is responsible for handling the probate process. Usually, the administrator is a spouse or close relative.
3. The lender collects payment from the estate.
During this stage, there are three scenarios that can happen:
- Full repayment. If there’s no cosigner, beneficiary or spouse that’s taking over the car loan, the lender can collect full repayment from the estate.
- Monthly repayments. If someone’s taking over the debt, the lender will continue to collect monthly repayments from the estate before the debt is handed over. Or, a cosigner will continue to make repayments.
- Repossession. If the estate can’t cover the full cost of the car loan and nobody plans on taking over the car loan, the lender repossesses the car and sells it to cover the loss. It’ll return any remaining funds to the estate.
4. The responsible party covers any remaining cost.
After the probate process is over, anyone who was named as responsible for paying off the loan takes over repayments. If the estate covers the debt or the car is repossessed, then nobody needs to assume the loan.
Who’s responsible for paying off the loan?
How the loan gets paid can vary depending on factors like whether the owner had a cosigner, life insurance or even where they lived.
If they had a cosigner or coapplicant …
Anyone with their name on the loan is responsible for covering repayments. This includes cosigners, coborrowers and joint applicants. In fact, there’s no need for probate to transfer the debt since the loan is already under your name. This is true even if you don’t inherit the car.
If you don’t make repayments, the lender can repossess the car and even sue you for repayment if the sale doesn’t cover the full cost.
If they had credit life insurance …
Credit life insurance is an exception to the cosigner rule. If the owner bought credit life insurance on their car loan, then the insurance company is responsible for covering the debt — even if they had a cosigner or surviving spouse.
If they were married and lived in a community property state …
In a community property state, spouses are jointly responsible for all of the debt they took on after marriage. Even if you didn’t cosign your partner’s car loan, you’re responsible for handling repayments if you live in one of the following nine states:
- New Mexico
You won’t be responsible if your spouse took out credit life insurance, however.
If they named a beneficiary or have a surviving spouse …
Anyone who inherits an unpaid car loan has the option to take on repayments if they want to assume the loan. Otherwise, the lender can repossess the car.
How do I transfer ownership after the car owner’s death?
Generally, you need to follow these steps to make sure the car loan is fully transferred to your name.
- Send the lender their death certificate. Make sure the lender is aware the owner died as soon as you can to avoid any delinquencies or defaults on the loan.
- Make sure payments are covered. Also reach out to the lender to make sure someone is covering the repayments — be it the estate or cosigner. Otherwise, the lender might try to repossess the car.
- Transfer the title. Each state has a different title transfer process if a car owner dies. Reach out to your state’s Department of Motor Vehicles to find out what you need to do.
- Pay registration fees and taxes. You’ll also need to register the car in your name and pay the same taxes your state requires with any new vehicle.
- Sign up for car insurance. Sign up for the legally required car insurance in your state for your new vehicle.
- Refinance or pay off the loan. If you think you can get a better deal, consider refinancing with a different lender to help you save on interest. If not, pay it off according to the current rates and terms.
In some cases, it might not be so straightforward. You might want to consider hiring a probate attorney to help you navigate the process of transferring the loan if you’re struggling on your own.
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What can I do if I can’t afford the loan?
Unless you’re a spouse or cosigner, you likely don’t need to take over the loan. Beneficiaries can’t be forced to assume a loan they didn’t cosign — as long as they aren’t a spouse in a community property state. In that case, the lender will repossess the car and sell it to cover its losses.
But if the car is worth more than the loan balance, consider selling it yourself and using the funds to pay off the loan. That way, you could make a profit.
You likely won’t have to pay off your relative’s car loan if you didn’t cosign it. That is, unless your spouse has a car loan and you live in a community property state. But if you inherit a car that’s not fully paid for, you’ll need to assume the loan to keep it. You can learn more about how it all works with our guide to car loans.
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