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How Will Your Outstanding Loans Affect Your Heirs?

Do you know what happens to the outstanding amount of a secured or an unsecured loan after the demise of the borrower, and how does it affect the heirs?

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Amit Sethi
September 7, 2023
Outstanding Loans Affect Your Heirs

Outstanding Loans Affect Your Heirs

When you take a loan from a bank or a financial institution, they usually take all the precautionary measures to ensure that they can recover their money in case of a default in repayment. Depending on the type of loan, the bank uses different methods to recover their money. In some cases, the recovery procedure may also affect the legal heirs. So, let’s check out the impact of outstanding loans on the heirs of deceased borrowers.

If The Loan Is Secured 

In a secured loan, the borrower has to pledge an asset equal to or more than the size of the loan. For example, in a loan against property, the bank allows a loan of around 50% to 80% of the property’s value. In such a loan, after the demise of the original borrower, the lender approaches the legal heir to recover the loan amount. If the legal heir fails to repay the outstanding loan amount, the lender can seize the pledged asset and auction it to recover their money.

If The Loan Is Unsecured

In an unsecured loan, the bank extends the loan amount based on the borrower’s financial credibility. Examples of unsecured loans include personal loans, credit card loans, etc. In the case of an unsecured loan, the lender usually can’t take legal action against the heir of the original borrower to recover their money. However, many lenders nowadays take consent from the borrower through a clause in their loan agreement that indicates the transfer of liability to their legal heirs on their untimely death. So, in such a case, the legal heir needs to repay the outstanding loan amount to the lender when claiming the ownership of the assets.

What Should You Do?

When taking a loan, always enhance the size of your life insurance cover to that extent so that on your sudden demise, your family and legal heirs don’t have to face financial hardship for repayment of your outstanding debts. Always make a list of all your assets and liabilities and ensure that your family and chosen legal heir know it. Try to repay your loans on time. Before signing a loan document, ensure you have read and understand all the terms and conditions mentioned on the loan document.

 

The author is an independent financial journalist

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