A look at the steps lenders can take to recover loans from the legal heirs
A lot depends on collateral and if there’s a guarantor, a co-applicant or a co-borrower in the loan
Many families who lost breadwinners are unsure what happens to the deceased’s loans or credit card outstanding. Engaging with collection agents would be the last thing on their minds. Steps that financial institutions will take for the recovery of dues vary based on the category of the loan. In some cases, like a home loan, lenders have regulations to help them in recovery. In others, like a personal loan, there is no legal recourse for a lender.
A lot depends on collateral and if there’s a guarantor, a co-applicant or a co-borrower in the loan. Let’s look at the steps a lender could take for loan recovery.
Home loan: As home loans are long-tenured products, lenders structure them in a way that their recovery is not affected in case borrowers die. Lenders ensure that there is a loan co-applicant. Many don’t sanction the loan unless the borrower has an adequate life insurance policy.
If one of the co-borrowers dies, the responsibility to repay the loan is on the other. The co-borrower who is alive will need to continue repaying the loan.
“The co-borrower should inform the lender of the death of the other borrower. The lender will remove the deceased from the loan. If the repayment was linked to the bank account of the deceased, the lender will change it. The co-borrower who is alive will need to start repaying from his or her bank account," said Gaurav Pawra, CEO, Clix Housing Finance.
If the borrower had purchased a group life insurance policy from the lender, the latter would approach the insurance company for a claim. The lender will reduce the loan depending on the insurance payout. The co-borrower will continue to pay the remaining amount.
If the claim amount is higher than the loan outstanding, the insurer will pay the additional money to the nominee. If a borrower had individual life insurance, the nominee could claim it and settle the loan.
If there are no co-borrowers, the lender will first resort to the life insurance option. If the insurance claim is not adequate to pay the entire loan, the lender will provide some alternatives to the legal heirs.
The first option for the family is to repay the loan by arranging money. If the legal heir, say, the son of the deceased, is willing to pay the EMI, the lender will add him as a co-applicant after checking his creditworthiness.
If neither the family (legal heirs) can repay the outstanding nor can legal heirs be added to the loan, the lender can take possession of the house under the Sarfaesi Act. It can then auction the property to recover its dues.
No lender allows another person to pay the EMI on behalf of the borrower due to KYC and money laundering regulations..
Personal loan/credit card: Personal loans and credit cards are unsecured. If a borrower or a card user dies, the lender will write them off. “There are no provisions to hold the legal heir responsible for the repayment of a loan," said Satyam Kumar, CEO and co-founder, LoanTap.
According to Kumar, most lenders and card issuers these days ensure that there is an insurance policy for personal loans. On the death of the borrower, lenders would file a claim with their partner insurer.
“In some cases, the family could be willing to repay the personal loan out of love and affection for the deceased. The lender could waive charges, penalties (if any) and would even be willing to take a haircut if need be," said Adheer Dhar, a banker who has worked with Citi.
Vehicle loan: When a borrower takes a loan for a car or a two-wheeler, the vehicle is mortgaged with the lender. On the death of the borrower, the lender will approach the family to settle the loan. “In case the family is not in a situation to repay, the lender can take possession of the vehicle, which it will auction to recover the dues," said Kumar.
According to him, in rare circumstances, if the legal heir is willing to repay the EMI, the financial institution may book a new loan in his or her name and ask the family member to take ownership of the vehicle by way of transfer.
Education loan: Most lenders don’t give an education loan without a guarantor. If the loan amount is higher than a specific limit, parents of students must also offer collateral. If the borrower dies, the bank will approach the guarantor (typically, parents) to repay. The financial institution can also auction the property offered as collateral if the guarantor is unable to repay the loan.
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