In today’s world, people take loans from banks to fulfil various needs. These loans help people buy houses or vehicles, and some even start their businesses. In return, they repay the loan along with interest.

When a person applies for a loan, the bank usually checks their financial history and approves the loan only if they are confident it can be repaid. Throughout this article, we will share all the details about the new process of how banks recover money when a borrower dies.

How Does the Bank Recover the Loan?

Sometimes, the borrower dies before repaying the loan. In such cases, loan recovery becomes complicated for the bank. This raises the question—if the borrower dies, how will the bank recover the loan?

Bank Contacts Co-Applicants and Guarantors

According to Tata Capital, if the borrower passes away, the bank first contacts the co-applicants of the loan. If the co-applicant is also unable to repay, the bank then reaches out to the guarantor, legal heirs, or close relatives of the deceased.

Bank Can Seize and Sell Property

If none of these individuals can repay the loan, the bank seizes the borrower’s property. This includes the house or vehicle purchased with the loan. The bank then auctions the property and uses the proceeds to recover the loan amount.

Other Assets May Also Be Seized

If the loan amount is still unpaid after the auction, the bank can seize other assets owned by the borrower and sell them to recover the remaining loan amount.

Repayment of a Personal Loan After the Borrower’s Death

1. Informing the Bank – The family or co-signer must notify the bank about the borrower’s death to stop normal loan repayments.

2. Co-Applicant’s Responsibility – If there is a co-applicant, they will be responsible for repaying the loan.

3. Settlement Request by Family – If no co-applicant exists, the family can request the bank to settle the outstanding amount.

4. Insurance Policy Check – The bank will check if the borrower has loan insurance. If yes, the insurance company will repay the loan.

5. Checking Borrower’s Assets – If no insurance exists, the bank will check if the borrower left behind any assets or properties for legal heirs. If available, the bank may file a suit to recover the loan.

6. Loan Write-Off – If the loan cannot be recovered, the bank will write it off as a Non-Performing Asset (NPA).