When taking a finance loan out on a car, it's imperative that you do your research and fully understand the commitment you are making. Buying a car is a great feeling, and being approved for a loan indicates the lender trusts you'll be able to pay it back.
If you can't make one of your monthly repayments in the future, this could impact keeping possession of the car, and your credit history will be tainted, meaning you may struggle to take out future loans.
While we look at a scenario like that and think it's the absolute worst case that could happen - and hope it never does - it's often been asked what would happen to your car finance deal if you or a loved one were to pass away while repaying the loan.
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Bereavement is a difficult enough period for families and friends without having the worry of finances and other unwanted issues; it's valuable to know what happens if this were to happen to you or someone you know.
We dive into what happens to a car finance agreement in the event of death, including whether it's cleared, who is responsible, and how to settle any finance accumulated.
Does a car finance debt get cleared after death?
Unfortunately, if you pass away while you own a car on finance, your debt will not be cleared. The car lender has agreed to loan you the money on the grounds that they will get it back plus interest over time. They are a business at the end of the day and expect the money to be repaid.
It's not a pleasant experience for your loved ones to have to sort out the finer details in a situation like this. There will be expectations to make arrangements to keep the payments going, especially if you are on a Personal Contract Purchase (PCP) or Hire Purchase (HP) deal.
If you had a lease agreement, you would be able to terminate the contract, but it would include early termination penalties.
Who is responsible for the car finance after death?
It all depends on the type of finance you had and if you had a guarantor when you signed the contract. If you did, then they would automatically be responsible for the repayments.
If you took out a joint agreement with a partner, as expected, they would take on full ownership of the deal and have to make the repayments on behalf of you both.
However, the most likely situation is the loan would become part of your overall estate and, depending on whether you have a will, a nominee will take care of your debt.
If you have a will, the process should be much smoother than without one, as a next of kin would need to take charge of the process, which may cause more unnecessary stress in the aftermath of your death. That's why it's critical to have a will in place.
How is car finance settled after death?
Whoever takes over from your estate, whether that be whom you nominated in your will or volunteered if you didn't have one, they will manage the finances and work out the best way to proceed with the loan.
If you took out the finance as a personal loan, the car belongs to you already. It could make it easier to clear your debt as you could sell the car and put the money towards repaying the debt.
Your nominated person would likely have to contribute an amount to cover the rest of the loan; it's unlikely you'd be able to sell the car for as much as the remaining loan was worth.
If finances were in order and there was no need to sell the car, then the vehicle could be given to a family member rather than sold. It all depends on what your estate looks like in death.
In this instance, the vehicle still belongs to the lender until you have made the agreed monthly repayments. It means the nominated person of the estate has a few options.
They could pay off the early settlement figure and keep the car themselves, paying off all the remaining debt in one go. It's likely the least common option as there may be more debt in the estate that needs paying off.
They could hand the car back to the finance company to sell at an auction, with whatever it makes coming off the remaining debt. Again, this likely won't cover the whole amount of the car, so the nominated person will have to cover the rest of the loan.
Finally, the best possible outcome is the nominated person could go down the voluntary termination route. If over 50% of the finance has been paid already, you can hand the car back to the lender without paying anything more, providing the vehicle is in good condition.
What if family/friends don't have the money to cover car finance after death?
The lender will expect your nominated person to pay off the remaining debt no matter what. However, there's every chance there will be other debts you've left behind, and it may not be possible to cover the cost of the loan.
The nominated person in this instance could try to negotiate a settlement with the lender for less than is owed. The finance company may be prepared to accept a lower offer than go through legal action, though it cannot be guaranteed.