Before agreeing to cosign on a car loan, it’s important to understand the risks. Doing the favor of cosigning on someone’s auto loan can help them qualify for the car they want — but whether you should cosign isn’t a decision to make lightly. As a cosigner, you’re responsible for…
One way or another, your lender still has to be paid. The only question is: how?
Believe it or not, there’s a decent chance you’ll die with some debt to your name. According to a Credit.com study using Experian data, among consumers that had debt with they died, 37% had mortgages and 25% had auto loans.
Unfortunately, there’s no magic fairy that waives away your car loan balance when you pass away like with some student loans. The process of settling your final affairs — including what happens to your car loan — all are handled through a process known as probate.
Probate in a Nutshell: What Happens When You Die?
The process for what happens to your car loan (and the car) after you die varies a bit from state to state, but the general course is pretty similar. It’s all handled through probate, which is the legal process of closing out your tab, essentially.
Anything left over after paying your creditors and debt collectors such as your car gets distributed out to your heirs or family members. It’s a process that usually takes several months or even years to complete, and as we briefly run through the process, you’ll see why.
Someone’s put in charge of settling your estate
Running through all the legal and personal finance hurdles is a big job, and so first, a probate court will put someone in charge of the process. If you named an “executor” of your will during your estate planning, the job will generally fall to this person. If you died without a will, the court will name an “administrator” to see the process through.
Your estate and debt are tallied up
Your “estate” is everything that you legally own, such as your bank accounts, your home (if you own part of it or all of it), and all of your stuff. Your executor will tally up their value and use these assets to pay the ongoing bills while your estate is going through the probate process.
Just because you’re gone doesn’t mean that your car payment isn’t due anymore, for example, and your executor will continue paying the bill using your assets until a final decision is made about what to do with the car. Your executor should provide your creditors with a death certificate, though, to let them know that your estate is currently going through probate.
Your debt is settled
The bigger job, though, is to pay off any debt you still owe. If you have any credit card debt, personal loans, mortgages, or yes — car loans — your executor will try and use your assets to pay off these loans.
In some cases, they may have to sell some of your assets. They might need to sell your vinyl record collection to pay off your credit card debt, for example. They may even be able to sell the car itself to pay off other loans. But as we’ll see in the next section, if your heirs want to keep any of your stuff that’s not fully paid off by the estate, they’re generally able to do so by taking the debt on for themselves.
Your assets are distributed to your heirs
If there’s enough money once your debt is paid off, your heirs get anything that’s left over in the form of an inheritance. This can be cash or physical things, including homes and cars. In many cases, if you have secured assets like homes and cars that weren’t able to be paid off by the estate, your heirs can choose to take on that debt for themselves.
This is commonly the case with family homes, for example. A mortgage is a huge debt, and it’s actually quite common to die with an outstanding balance still due.
But rather than sell off the home outright to pay off the rest of the mortgage and have it be lost from the family, generally the executor of your estate will give your heirs first crack at refinancing the mortgage in their own name so they can keep the home. That way, the house can stay in the family and the creditors still get paid.
Car Loans After Death: Other Scenarios
Now that we’ve covered the basics for how probate works with most car loans, we can consider some special cases.
If your car loan has credit life insurance
“Credit life insurance” is a special provision that you can buy along with your loan. If you pass away, this provision wipes away any debt on the loan, including if you have any surviving co-signers. This means the car loan vanishes overnight as if there really were a magic fairy, and your heirs or cosigners get to keep the car entirely free and clear.
If you have a cosigner or co-borrower
If you have a cosigner or joint account holder on your car loan, the loan now becomes theirs and theirs alone. It’s now their job to finish paying off the remainder of the loan, with no help from you.
If your cosigner only cosigned to help you get the loan and hasn’t been making loan payments themselves, this might come as a bit of a shock to them. Unfortunately, if they’re not able to make the monthly payments, the car will likely be repossessed and their credit will be damaged. They can also opt to sell the car if they can’t afford the payments, which is a better solution because they get cash and won’t have their credit damaged.
If you have a spouse
The case with surviving spouses gets a little tricky, and it all depends on which state you live in: specifically, whether it’s a community property state or not. Only nine states are community property states:
- New Mexico
Alaska is also a hybrid community property state.
In community property states, any debt that you take on while you’re married also become your spouse’s debts, even if they didn’t cosign on the loan. Thus, it’ll be the same case as with having a cosigner: It’ll now be their sole responsibility to make the payments on the loan, and if they can’t, they’ll either need to sell the car or it will be repossessed.
If you live in a non-community property state and your spouse isn’t a cosigner on the loan, they won’t be on the hook for the car loan. In this case, it’ll likely proceed through the probate process as normal.
If you leave the car to someone else
If your estate is able to pay off the car loan and you leave the car to your heirs, they’ll get the keys at the end of the probate process.
On the flip side, if you didn’t have enough assets to pay off the car loan and you still want the car to be left to your heirs, they’ll need to take out a new loan in their own names. This is called refinancing, and they’ll need to meet the requirements to get a loan on their own. This usually means they’ll need a certain credit score and enough income to be able to make the payments on their own, or possibly with their own cosigner.
If a loved one has passed away and you’re interested in keeping their car, it’s important to stay in touch with the executor of the estate and let your wishes be known. Otherwise, it’s possible they could unknowingly sell the car to settle other debt.
One important thing to consider is how much is left on the loan. If you’ve been paying down the loan for a while there might not be that much left to pay on it, and so your heirs could get a good car at a cheap price.
Say, for example, that there’s still a $3,000 car loan on your nana’s Dodge Viper convertible after her estate is settled. That’s a good deal for such a fancy car, and if your Nana left it to you, you can choose to refinance the loan in your own name and make the car — and its car loan — your own.
Car Loans Don’t Go Away When Someone Dies
Unfortunately, unless you’ve purchased credit life insurance, your car loan doesn’t pass away along with you. It’ll be paid one way or another, whether that’s by the executor or administrator using funds from your estate, by your beneficiaries through a refinanced car loan, or by the lender repossessing the vehicle.
Probate is a complex process even at the best of times. If you have a complex financial situation with many trusts, debt, tax liens, physical assets and accounts in different places, it can turn into a rat’s nest real quick. In these cases it can be a good idea to seek out a probate attorney to help you through the process.
Finally, if you’re taking on a car loan from a loved one, make sure to shop around for the best interest rates on car loan refinancing. The last thing you want to worry about after inheriting a car is not being able to make the payments.