What happens to your car loan when the cosigner dies?

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, you need to know what happens after a cosigner dies and who is responsible for payments.

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 there are certain conditions.

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.

“Usually, nothing happens. Certainly, the lender could take action if they became aware of the death, but awareness would only come if the lender tries to contact the cosigner because the loan is in danger of default,” says Mike Sullivan, a personal financial consultant with the nonprofit financial counseling agency Take Charge America.

Be mindful of automatic default clauses. Read your auto loan contract very carefully, as it can often state you are in default if you fail to make a payment by a certain date or have other stipulations. In worst cases, some loans have been known to demand immediate and full repayment of the loan if a cosigner dies. 

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 would 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?

Find out how the vehicle was handled in the deceased person’s will, if they had one. It’s possible the estate may pay off the car, but you should keep making payments until the estate is taken care of. Be aware that the rules can vary by state. 

Typically, if the primary person on the car loan dies, then full responsibility for the loan automatically goes to the cosigner, who will now need to pay the debt. If you find yourself in such a situation, keep up with the payments so as not to damage your credit and talk with the lender about the next steps to take.

“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.”

Keep in mind, you won’t automatically assume legal ownership of the vehicle as a cosigner if the primary borrower dies. Even if you pay it off, you still act as a “silent partner.” The car would likely be part of the estate. You would need to buy the vehicle outright to gain ownership, or have a surviving family member gift you the car. 

There are also life insurance products that protect people in the event of a primary borrower’s death. One key product is credit life insurance, which uses insurance coverage to pay off the remaining balance of the loan and transfer the car to the estate in the event of a primary borrower’s death. It even protects cosigners. You may need to check if such a policy was on the loan.   

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.