When you take out an auto loan, you do so with the expectation that you will own the car in full within three to five years. If you pass away before an auto loan is fully paid off, what happens to it depends on what you have set up while you are still alive. The car may go back to the dealer because it is a secured debt, it may be paid off in probate or you may have it covered with death insurance.
An auto loan is a secured debt. This means that if the debt is not paid, the original creditor has the legal right to take back the physical property that the debt was approved for. If you default on the loan payments, for example, the auto loan company can repossess your car. If you pass away, the company may settle the debt by taking back the vehicle because there is no one else responsible for repaying the loan. Heirs and beneficiaries cannot be held liable for paying the rest of the auto loan after you pass away because debt cannot be inherited in the United States.
When you own property in the United States, most state governments require a legal process to happen when you pass away. This process, known as probate, helps carry out the terms of your last will and testament, pay off your debts, and distribute your assets to beneficiaries as you desire. Depending upon state laws, an auto loan may be listed as a debt against your estate so that it can be paid off in full before your assets are distributed to heirs and beneficiaries.
Some auto loan companies and other creditors offer a form of insurance specifically designed to pay your debt balance in full if you pass away. If death insurance is available for your auto loan and you choose to pay for it, the loan is automatically paid in full when you die so the car will be listed as an asset in your estate during probate. As an asset, the car can be given to a specific person as an inheritance as designated in your will.
The assets of your estate can include real estate, collectibles, cash, or investment bank accounts and insurance policies that you have designated as payable to the estate. If you own enough assets to cover the remaining cost of the auto loan, the probate court may order that the auto loan be paid off in full so that the car can be passed on to your surviving beneficiaries.
Kathy Burns-Millyard has been a professional writer since 1997. Originally specializing in business, technology, environment and health topics, Burns now focuses on home, garden and hobby interest articles. Her garden work has appeared on GardenGuides.com and other publications. She enjoys practicing Permaculture in her home garden near Tucson, Ariz.