People take different kinds of loans either from banks or some financial companies. From vehicle loans to home loans and from personal loans to gold loans, people take the loans for their personal benefits. However, sometimes they face difficulties to repay the loan. The COVID-19 pandemic has added to their owes. In some cases, the borrowers have died due to the virus. In such cases, do you know what happens to the loan and who has to repay it?
According to reports, the obligation falls on the co-borrower(s) or legal heirs in case the borrower dies without fully repaying the loan. However, they will be exempted from repaying the loan if the borrower had taken a home loan insurance.
You need to know whether the home loan was insured
When the borrower dies the co-borrower(s) or legal heirs must find out whether there was home loan insurance. For this, you have to thoroughly go through the home loan documents or ask the concerned banks. Because, a home loan insurance, according to Adhil Shetty, CEO of BankBazaar.com, is a guard against the risk of default in the event of the untimely demise of the borrower. Because of such uncertainty, during the loan tenure, the insurance company will settle any outstanding amount on the home loan with the lender, the moneycontrol.com quoted Shetty as saying.
There are two types of home loan insurance policies- a) reducing balance plan and b) level cover plan offered by the lenders.
a) Reducing balance plan: If you take the home loan in a reducing balance insurance plan, then the coverage and outstanding loan reduce with the tenure.
b) Level cover plan: In a level cover plan, the insurance cover remains the same throughout the loan tenure. You would understand it very clearly if given an example. Let’s say the deceased borrower had taken an insurance cover of Rs 50 lakh against a home loan. However, you have paid only 25 lakhs before your untimely death. In such case, the insurance company will repay Rs 25 lakh dues to the bank. The insurance company will give the remaining Rs 25 lakh to the borrower’s co-borrower or legal heir so that they would repay the loan.
The insurance company will repay the due loan if the house loan is taken under the level cover plan. However, there are certain conditions for this.
Can the insurance company deny the claim by the co-borrower or legal heir?
Yes, the insurance company has the right to deny the claim by the co-borrower or legal heir in case of non-disclosure of pre-existing health conditions, because this violates the insurance agreement. The insurance company will repay the loan only if the borrower dies naturally or after meeting with an accident.
The insurance claim will also be denied if the if home loan is taken in one bank or company and then port over to another bank or company for a cheaper home loan.
How to repay the loan if the home loan is not insured?
The co-borrower will have to repay the loan in the absence of a home loan insurance policy. The bank will also contact the home loan guarantor and the legal heirs and can help on compassionate grounds to make the repayment process easier.
Can banks or finance companies take possession of the property?
The bank or finance companies have the right to take possession of the property under the SARFAESI Act if the family or legal heirs fail to repay the outstanding loan. However, taking possession of the property is the last choice for the bank. Before doing so, the lender will have to give sufficient time to the co-borrowers and legal heirs.
The lender will classify the borrower’s account as non-performing asset (NPA) only if the monthly EMI of the home loan is not paid for 90 days. After classifying the borrower’s account as NPA, the bank will furnish a written demand notice to the co-borrowers requesting them to discharge liabilities within 60 days.
“On failure to respond to the same or after 30 days of any receiving dissatisfactory explanation, the bank will go ahead with the public sale of the asset,” says Khosla as quoted by the moneycontrol.com. “The bank will serve another 30-day public notice, sharing the details of the sale. In case the family makes some payment within this period, they will get some breathing space to re-negotiate repayment terms,” it added.
The best way to avoid repayment of the loan by your co-borrower or legal heir after your death is to take home loan insurance.