A car loan is a secured loan that permits the borrower to purchase a new vehicle or used car by borrowing from a lender, sometimes the car dealership, although other financial institutions also issue auto loans. Most auto loans have terms of three to five years, although you may be able to get a 10-year auto car loan.
Unlike some other forms of debt, your car loan is not forgiven when you die. The car loan death clause is the portion of your loan paperwork that describes what happens to the auto loan if the borrower dies. In most cases, the borrower’s estate is responsible for the loan, liquidating assets to pay it off. But what happens if the estate, including liquid funds in checking and savings accounts, doesn’t have enough money to cover the loan?
Read more: What Happens If You Miss a Car Payment?
Let’s look at a number of scenarios that can take place when someone dies with a car loan, what the car loan death clause means for the lender and what it means for the borrower and their surviving spouse or heirs.
What the Car Loan Death Clause Means for the Lender
When a person dies, they are considered to have defaulted on the loan if they don’t continue making the payments. Sometimes, a co-signer on the loan or the surviving spouse will continue to make the payments and keep the car. Even if the person was not a co-signer, the financial institution will often let the loan terms continue. When the loan is paid off, the survivor may need to show a death certificate in order to have the vehicle title transferred to their name.
In community property states, debt incurred while the couple was married becomes joint property upon one spouse’s death. Then, the surviving spouse would simply take over the payments the same way a co-signer would. Community property states in 2020 are:
- New Mexico
In some cases, the deceased person will have an estate with assets that can cover the full cost of the loan. The executor of the estate would make sure the car loan gets paid off, and the car would remain part of the estate, to be distributed as per the will or as determined in probate.
If there’s not enough money in the estate to cover the loan, the lender has options. If there is no co-signer and none of the borrower’s family members steps up to make the loan payments, the lender can proceed with repossession. They would sell the car at auction, making back some or all of the loan’s value.
What the Car Loan Death Clause Means for the Borrower
While the car loan death clause gives the lender options to recover their funds if a person dies, it gets a bit more confusing for the borrower’s estate, family members and loved ones.
If there was no co-signer, family members, heirs or the surviving spouse of the loved one may have an option to transfer the loan to their name. They would continue making payments and own the vehicle when it’s paid off.
In other scenarios, the bank will require family members or the surviving spouse to refinance the car with a new loan. Since most lenders won’t approve a car loan without car insurance, they will need to transfer the registration and car insurance to their name as well. Interest rates and loan terms may change depending on the new borrower’s credit history, credit score and income.
Read more: Do You Need a Driver's License to Get Car Insurance?
In addition, if the loan value is greater than the vehicle’s Kelley Blue Book value, which means the borrower has negative equity in the car, the lender may not sign-off on the loan. These loans may also be considered “underwater” or "upside-down.” An auto loan is a secured loan, offering lower interest rates than credit cards or personal loans because the car acts as collateral if the borrower defaults. If a borrower has negative equity, the lender may not recoup their costs if they have to repossess and sell the car.
What Happens When The Deceased Person Wills the Car to An Heir
If the deceased has left the car to a loved one in their will, that person can legally take possession of the car, take over the payments and transfer the title to their name. To transfer the loan, the heir would need a copy of the will and a copy of the death certificate.
What Happens When the Deceased Person Doesn’t Have a Will
If there is no will, all the outstanding debt and assets would go to probate. In probate, the executor of the estate would dole out funds to pay off the car loan or determine who should inherit the vehicle and the loan. If there are no heirs and the estate doesn’t have the funds to fulfill the loan obligation, the lender would probably repossess the vehicle.
Car loans differ from credit card debt in this regard. First, the deceased person’s estate must try to use liquid funds, such as checking and savings accounts, and other assets to pay off the credit card debt. Any remaining debt will be forgiven.
It’s important to note that the estate does not have to use life insurance payouts to settle a car loan or to pay outstanding credit card debt. The life insurance beneficiary can cash out the policy and let the lender repossess the vehicle with no ramifications, while the credit card debt will be forgiven at that point.
How Credit Life Insurance Can Help Your Loved Ones
If you want a family member or surviving spouse to inherit your car without the payments, you can consider a credit life insurance policy. This is not a term or whole life insurance policy in the true sense of the word. Rather, it is optional insurance you can take out that would fulfill your debt obligations should you die.
Purchasing credit insurance can add a substantial amount to your loan payments, but the peace of mind can be worth it if you want to give your family one less thing to worry about as they settle your estate.
However, if your loved one doesn’t need the car and you don’t live in a community property state, you can just as easily let the lender take repossession of the car after your death.
- Quicken Loans: Which States Are Community Property States?
- Interest.com: 3 Roadblocks to Refinancing Your Auto Loan
- ConsumerFinance.gov: What is credit insurance for an auto loan
- Consumer Financial Protection Bureau. "If Someone Dies Owing a Debt, Does the Debt Go Away When They Die?" Accessed April 10, 2020.
- Legal Zoom. "What Does 'Your Estate' Mean When a Relative Has Passed Away?" Accessed April 10, 2020.
- The Judicial Council of California. "Wills, Estates, and Probate - Step 1: Figure Out Who Will Be The Estate Representative." Accessed April 10, 2020.
- Consumer Financial Protection Bureau. "What Is Credit Insurance for a Auto Loan?" Accessed April 10, 2020.
- Federal Trade Commission. "Debts and Deceased Relatives." Accessed April 10, 2020.
- Experian. "What Happens to Debt When You Die?" Accessed April 10, 2020.
- Debt.org. "Debt of Deceased Relatives." Accessed April 10, 2020.
- Consumer Finance Protection Bureau. "Can I Be Responsible to Pay Off the Debts of My Deceased Spouse?" Accessed April 10, 2020.
- Consumer Financial Protection Bureau. "Can I Be Personally Responsible for Paying My Deceased Relative's Debts and Can a Debt Collector Contact Me About Those Debts?" Accessed April 10, 2020.
- Internal Revenue Service. "Basic Principles of Community Property Law - Community Property Law." Accessed April 10, 2020.
- Internal Revenue Service. "Basic Principles of Community Property Law - Title." Accessed April 10, 2020.
- Internal Revenue Service. "Basic Principles of Community Property Law - Gifts to Spouses." Accessed April 10, 2020.
- National Credit Union Administration. "Personal Loans: Secured vs. Unsecured." Accessed April 10, 2020.
- The Judicial Council of California. "Wills, Estates, and Probates." Accessed April 10, 2020.
- Maryland Department of Transportation. "You've Inherited a Vehicle." Accessed April 10, 2020.
Dawn Allcot is a full-time freelance writer, content strategist, and founder of GeekTravelGuide.net, a travel, technology, and entertainment website. A seasoned finance writer, her work has appeared on Forbes, Bankrate, Lending Tree, Solvable, Moneycrashers, and many other personal finance sites, including the award-winning Chase News & Stories portal. With more than 20 years editorial experience, Dawn seeks to take complex concepts and simplify them for today's busy readers. Whether she is writing about taxes or technology, her goal is always to educate, inform, and entertain.