Personal Loan: Who repays the loan if the borrower dies?

Availing credit facilities help an individual to meet their financial needs during various stages of life. Getting a personal loan is one such option and it helps in easing situations wherein one needs immediate money. It generally doesn't require much time to avail a personal loan due to the advent of digital application and approval processes.

While there are several aspects one should keep in mind while availing a personal loan, one factor often ignored is the liability of repaying the loan if the borrower dies during the loan tenure.

Who pays the personal loan if the borrower dies?

Personal loans are generally unsecured, therefore, in case the borrower dies, the lender might have to face some issues in recovering the loan amount.  In some cases, after the death of the borrower, the lender may initiate the process to recover the unpaid amount from the assets of the loan receiver. In such cases, the bank may even reach out to the legal heir to recover the dues.

However, legally in the unfortunate event of the death of the borrower of a personal loan, the lender can't force the legal heir or other surviving members of the deceased borrower's family to pay the remaining amount.

Moreover, no guarantor comes into the picture as personal loans are unsecured and no collateral or guarantor is required for availing of these loans. In addition, the lender can't seize or sell the borrower's property for acquiring the remaining amount as the loan was an unsecured one. Since the personal loan repayment isn't possible, this amount is eventually written off and is transferred to the NPA (Non-performing Assets) account.

Insurance policies over personal loans

However, nowadays, most unsecured personal loans are insured for the primary borrower. These insurance policies cover the remaining loan amount and are valid throughout the repayment period, saving the lender of losses.

Generally, the borrower needs to pay for the premium of such insurance policies at the time of availing the personal loan. This might be a not-so-favourable option for the borrower, but serves as a cover for the lender as in the event of the death of a borrower the lender doesn't have to lose out on the remaining loan amount.