What happens if your cosigner dies before your car loan is paid off?

After the death of a loved one, the last thing that is likely to be on your mind is your auto loan or your vehicle itself. However, if the deceased was your auto loan cosigner, you will need to understand how their death changes your situation. In such cases, you typically assume full responsibility for the loan, but this will depend on the conditions of your loan contract.

What happens to a car loan if your cosigner dies?

When a person gets a car loan with a cosigner, both the primary borrower and the cosigner are responsible for making the loan payments, and both people will have the loan listed on their credit reports. Typically, the cosigner has no ownership claim on the car.

Before you apply for an auto loan, you should know that a cosigner is held financially responsible for payments should the primary borrower not keep up with the loan. If the deceased individual was the cosigner, little about your loan is likely to change.

What if you defaulted before the cosigner’s death?

If you have already defaulted on the loan before the cosigner dies, the deceased individual’s estate may be on the hook for the loan. The loan contract often includes a clause covering the death of one of the parties, such as the cosigner.

In such cases, the deceased individual’s estate may become liable for the debt. If the loan is in default, the lender could pursue repayment from the estate’s assets — or from the living borrower. The cosigner’s estate may need to liquidate assets to pay off the remaining debt.

What to do after a cosigner’s death

If your cosigner dies, your first step is to decide if you need to contact the lender at all. If you can manage your loan payments and avoid default, you do not need to notify the lender of a cosigner’s death. It is usually up to the lender to find out when a cosigner dies.

However, there are a couple of cases where you would need to contact the lender if your cosigner passed away:

• If you want to remove the deceased cosigner from the car loan, you must meet with the lender and present them with a valid death certificate. You can acquire a death certificate from your state’s vital records office if you are a close relative.
• Depending on which of you received the loan bills, you may need to change the address now that you are the primary account holder.

However, if your cosigner had better credit than you did, thus improving the loan terms and lowering your interest rate, there is a chance your rates could shift. Without a cosigner, the lender could adjust or modify the loan rates to reflect your credit.

If you do find you have worse rates after your cosigner passes away, you might want to pursue refinancing options. Many online refinance lenders like RefiJet and iLending work with people who have lower credit scores.

What if the primary borrower dies?

Typically, the full responsibility for the car loan automatically goes to the cosigner when the primary loan holder dies. This means the cosigner will be responsible for keeping up with payments until the loan is paid off, or risk damaging their credit.

“It is the responsibility of the cosigner to make all payments or suffer severe credit and financial consequences,” Sullivan says. “The best advice for a borrower is to keep making timely payments. That is all that most lenders want or expect.”

If you are the cosigner taking over the auto loan, that does not mean you will assume legal ownership of the vehicle. Even if you pay it off, you still act as a “silent partner” and the car likely belongs to the primary loan holder’s estate. You would need to buy the vehicle outright to gain ownership, or have a surviving family member gift you the car.

In some cases, the deceased person’s estate will pay off the auto loan. However, you will be responsible for making payments until the estate is settled and the lender confirms the loan is settled. Be aware that these rules can vary by state.

Check if the primary borrower had credit life insurance

“Credit life insurance is a product offered by the lender or bank,” explains Natasha Cornelius, CLU and Bankrate editor. “There is often an option to purchase credit life insurance at the time of taking out the loan. In many cases, the lender just adds the premium to the loan balance.”

In the event that the primary borrower dies, credit life insurance pays off the remaining loan balance. In this case, the cosigner would not be required to pay off the car loan because the insurance payout would do that instead. But not all borrowers purchase this service, so check with the borrower’s estate.

Bottom line

The pain of losing a friend or family member is challenging to deal with. You may have to sort through some financial matters, especially if the deceased was a cosigner on your car loan. If you find yourself in this situation, the first step is to ensure loan payments remain current so that your credit is not impacted.

And remember, whether the deceased was the primary person on the car loan or simply a cosigner who helped you secure the loan, you are now the one who is fully responsible for managing it.