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When you've recently lost a loved one, dealing with the financial aftermath of the loss can feel overwhelming. Car loans are a common debt that remains after someone passes away, and handling them can be tricky.
After someone dies, any car loans they had don't disappear. Instead, they typically become the responsibility of the estate or other parties depending on the loan terms and your state's laws.
Let's explore how car loans are resolved after someone passes away and what it means for those left behind.
What Happens to a Car Loan When Someone Dies?
Lenders understand that a borrower may pass away during the loan's term and make provisions for this in the loan. After the death of a loved one, the terms of their auto loan will likely dictate who's responsible for repaying it.
The loan contract's death clause section will detail how the lender expects the loan to be repaid after the borrower's passing. Typically, the estate must repay the debt or the vehicle will be repossessed, but you may have other options.
Here are some of the most common scenarios that can affect how a car loan might be handled.
If They Purchased Credit Insurance
Credit life insurance is an optional policy add-on that pays off some or all of a loan when the borrower passes away. If the late borrower had credit life insurance on their car loan, the insurance company must repay the loan according to the policy terms.
Check the deceased's auto loan documents and insurance records or call the lender to find out if credit life insurance was purchased.
If There's a Cosigner
The purpose of a cosigner is to assume responsibility for a loan if the primary borrower can't make payments. If the auto loan has a cosigner, that person must take over the payments if the estate can't pay off the balance. Even if the will designates someone else to inherit the car, the cosigner is responsible for repaying the loan.
In most states, if there's no cosigner or co-borrower on the car loan, the estate is generally responsible for repaying the loan—not the person's family or beneficiaries. In these cases, the lender can't require the surviving spouse or others to take over payments and instead must repossess the car to settle the debt.
In community property states, however, surviving spouses might be responsible for part of the auto loan.
If There's a Surviving Spouse
If you're a surviving spouse, you're only responsible for repaying the loan if you're a cosigner, co-borrower or if your state requires you to do so, such as in community property states.
A community property state is one that considers the assets and debts you acquire during marriage to be owned equally by you and your spouse. This includes all income, property and debts, including a car loan. If you live in a community property state, you may be liable for the outstanding balance, even if your name isn't on the car loan or title. Nine states and Puerto Rico are community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska allows for community property in certain cases.
Typically, if you're not on the loan as a joint account holder or cosigner and you don't live in a community property state, you have no legal obligation to repay the debt. Under the Fair Debt Collection Practices Act, lenders and debt collectors can't pressure you into paying a debt you're not legally responsible for. If you're unsure about your responsibility for a car loan under your state's laws, contact your state's attorney general's office for clarification.
If There's an Heir Named in the Will
If you inherit a car according to the deceased's will, you may receive the car, but the loan doesn't automatically transfer. The estate must repay the remaining balance, after which you'll own the car free and clear.
However, if the estate can't cover the loan debt, the lender can repossess the car since it serves as collateral. The lender may also allow you to assume the loan if you want to keep the car. Contact the lender to learn the steps to transfer the car loan.
If the late car owner dies without a will or didn't designate an heir, it'll likely be up to the probate court to decide who gets the car. Regardless of who inherits the vehicle, the loan must still be repaid, or the lender may repossess it.
What Happens to a Car Lease When Someone Dies?
After a loved one dies, their car lease typically remains intact and must be repaid by a cosigner, co-borrower or the estate. Otherwise, the leasing company can repossess the vehicle to pay the outstanding debt.
If there's no one else on the loan, you may have the option to terminate the lease or transfer it to an heir or another relative. Check the lease contract or contact the leasing company to explore your options. If you can transfer the lease, start the process as soon as possible to help make sure the transfer is completed before the lease gets tied up in probate court.
The Bottom Line
Sorting through a loved one's financial matters after their passing can be stressful, but you may not be responsible for their car loan. Unless you're listed on the loan as a cosigner or co-borrower or live in a community property state, the estate should cover the debt. Be proactive and handle the matter quickly, but don't make any payments until an attorney clarifies who, if anyone, is responsible for the car loan.