What Happens to a Loan if a Cosigner Dies?

Cosigning is when two or more people borrow on a loan together. While this is often done because one of the individuals’ credit history isn’t strong enough to acquire the loan on their own, it’s also a viable strategy for acquiring a loan with better terms. But what happens if the cosigner dies? Below, you’ll learn more about how death can affect a cosigned loan and find advice for next steps.

What happens if your cosigner dies?

The first thing you should do if your cosigner dies is to dig up your loan documentation so you can review the legal implications. If you have no such documents, or cannot find them, head to the lender’s website to see if you can find them there.

Oftentimes, you’ll find that nothing changes. “As long as you never miss a payment or come up short, nothing changes dramatically,” says personal finance writer Eric Rosenberg.

Unfortunately, it’s not always that simple. Rosenberg says that some private lenders have clauses in their contracts that require the entirety of the loan balance to be paid, “even if your loan is current and you’ve been making on-time payments.” This is known as an automatic default and could be a major blow to your finances. If this happens, you should look into refinancing.

Look into refinancing

If you are facing an automatic default following the death of a cosigner, you should try to refinance your loan with another lender as soon as possible. As long as you are not switching to a loan with a higher interest rate, it should be beneficial. “Try to refinance without a cosigner,” Rosenberg says. “If you have been making on-time payments each month, your credit score has likely improved, which will help you when refinancing.” If you were making on-time payments before the cosigner died, lenders will see this in your credit report and it should encourage them to help you refinance with good terms.

What happens to your cosigner if you die?

If you take out a loan with a cosigner and die before the loan has been repaid, the surviving cosigner will be responsible for paying the remaining balance not covered by your estate assets.

“When a person dies, all of that person’s debts and assets combined make up an estate,” writes insurance and loan expert Emily Delbridge. “The estate is the total of the value of all assets or their net worth. This value may include checking, savings, and investment accounts as well as land or businesses in which the descendent has a controlling interest.”

If you purchased credit life insurance, the insurer will be responsible for paying part of the loan or all of it, depending on the terms. But if you did not purchase insurance, and your estate does not cover the remaining loan balance, surviving cosigners will be responsible for repaying the loan.

This is true even if, for example, a cosigner does not inherit the car for which an auto loan they cosigned was used to purchase. “In fact,” Delbridge says, “it’s true of any loan that was co-signed by a surviving person including mortgages and home equity lines of credit.”

Depending on the state, if the cosigner fails to continue the payments, their wages may be garnished and the car may be repossessed. This can still be true even if you left the car to a third party in a will. “The co-signer is still responsible for the car loan,” Tara Mello writes in an article for Bankrate. “Whether the third party would own the car in part or in full once it was paid off would depend on how the loan and the title were written initially.”

Inform your lender

One of the steps you can take to avoid legal troubles — whether a loan cosigner dies or you are a surviving cosigner — is to inform the lender right away. In some cases, you may even be obligated to do so. “Ignoring that may put you in breach of contract,” Rosenberg warns, which can come with financial and legal fallout. You may be sued by a financial institution, or your loan may be placed in automatic default. “Some [financial institutions] scan public death records, automatically matching names and placing loans into default,” Rosenberg says. By getting in touch with the institution, you may be able to get them to release the deceased cosigner from the loan so that you can go on as though you were the sole borrower.

The death of a friend or relative is always a terrible thing. It’s also one that can have major financial implications if they were the cosigner on a loan. In the case of such an unfortunate event, make sure to get in touch with your financial institution right away and take charge of the situation to ensure your financial future is safe.

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