Taking out a loan is serious business—simply qualifying for a loan is difficult enough. There are many variables to consider when thinking about applying for a loan, one of which is finding a cosigner.
To qualify for a loan, it’s advisable to find someone (a cosigner) who can back you on a loan agreement. But before taking that step, you must ask: if a cosigner dies, what happens to the loan? What share of the debt would be in your name?
When taking on a loan, you are the primary debt holder, and the cosigner is someone who legally helps validate your loan. But what happens upon the death of a cosigner?
In this article, we examine the various aspects of your loan upon a cosigner’s death, as well as the eventuality of an auto-default (automatic default) situation, and what that means to the primary debt holder of the loan agreement.
What is a Cosigner on a Loan?
A cosigner is someone who signs an agreement/contract with you (the contract holder) who also takes full responsibility for the loan repayment if the contract holder does not pay back the loan. In most cases, a cosigner is a:
- Family member
- Company or business
Most legal contracts require signing authority from a cosigner on a loan before any contractual procedures can move forward. You’ll likely need a cosigner on these types of loans:
- student loan
- home improvement
What Happens When a Cosigner Dies?
If a cosigner dies, what happens to the loan? Depending on the loan agreement and the organization granting it, the contract could have several different or changing stipulations once a cosigner dies.
In most cases, it’s imperative to immediately notify the lender of a cosigner’s death, as a lender could apply additional charges if this information is not promptly or accurately communicated. There is also the fear of an automatic default action, which could ultimately lead to debt collection. An automatic default clause is when lenders include in their loan agreements (usually student loans) that if your cosigner should die, the remaining balance of your loan is immediately due (in full) by you, the primary debt holder.
In addition to the question of what happens if a cosigner dies, upon communicating your cosigner’s passing to your lender, make sure to provide a promissory note or death certificate, to ensure that your cosigner release form is given to you.
If you’ve been making payments on a loan and your cosigner dies, you now have the full weight of that debt on your shoulders. This could sequentially have serious consequences on your credit score and your ability to apply for loan refinancing.
You must discuss these aspects of your loan agreement with a loan officer before signing it, as there is always the risk of economic hardship if the loan repayment falls squarely on you, with no help of a cosigner.
Private lenders have different agreements for various types of loans. Some companies avoid automatic defaults on certain types of loans, such as student loans. Make sure that you’re able to repay a loan and (among other considerations) examine the best possible interest rates before selecting a loan agreement.
What Happens if a Cosigner on a Student Loan Dies?
First, when applying for private student loans, remember that a cosigner on that loan needs to have the ability to back its total amount.
But if a cosigner on a student loan dies, what happens to the loan? If a cosigner passes away, the contract holder still has the responsibility of carrying that debt while maintaining regular repayments on the loan—but sometimes you’re required to immediately pay off the remaining loan amount. Several banks, however, offer student loans without this automatic default clause, including PNC Bank, Wells Fargo, Discover, and Sallie Mae.
But other lenders and organizations who offer student loans have stopped giving automatic default protection because so many students have racked up large amounts of debt for education fees.
You can find a full review of ‘discover student loans’ here. This makes life much easier when trying to apply for an educational loan, as it makes navigating a loan agreement much easier. While these may not be the best personal loans for bad credit, they are safe for most first-time applicants and students.
Can you refinance student loans? It’s best to find someone to back you ahead of time or, at least, find a way to increase your income—to be in a better position to afford loan refinancing before you reach an automatic default situation.
Loans with a cosigner are usually accompanied by a list of various rules. Be sure to take note of your loan provider’s agreement. The contract will likely state whether you can replace the cosigner or not. The loan officer should provide you with the necessary legal documents to help facilitate the process in case of the death of a cosigner, which would likely include:
- Removing a cosigner from a student loan if they pass away.
- Signing a cosigner successor clause, which enables you to release a cosigner from the original contract and replace them with another.
- Filling out a cosigner release form, which removes the previous cosigner from the contract.
Common Concerns Regarding the Death of a Cosigner
Most are concerned about how the death of a cosigner will affect their loan agreement. Most lenders clearly state their terms and conditions in such cases.
Once you take out a loan, you are the primary debt holder. If you pass away, the debt you owe is transferred to your cosigner. If your co-signer dies, you generally need a new cosigner for the loan agreement to be valid. If you cosign a loan and the person dies, you, likewise, are required to immediately pay the loan off.
Federal law dictates that if your cosigner dies, you’ll either need to find another cosigner or refinance the loan—in this regard, you could apply for a credit card consolidation loan to help manage payments. In any case, you need to study the death clause in your loan agreement, as it should give you a clear indication of the various rules and terms within your agreement.
Note that it’s also important to stay in touch with your cosigner. If they experience serious health issues, it might be wise to remove them from the agreement before their demise, to eliminate confusion about additional fees or charges should your cosigner pass away.
Specialized loans and certain types of insurance do exist, such as a Credit Default Swap (CDS)—a type of credit derivative that provides protection against default. In most cases, however, you’re expected to repay the loan.
Handling a Loan Repayment After a Cosigner’s Death
We have briefly considered the question of what happens when a cosigner dies. Again, since you are the primary contract holder, upon the death of your cosigner, you are responsible for the debt owed. And you’re likely to pay a slightly higher amount on your loan unless you find another co-signer. In some cases, however, you might be able to work out a new repayment plan with your lender. In such cases, your best options might be to:
- Refinance the loan with another one. But this is generally quite risky, as it could incur serious debt. You could go online and check out companies with the best personal loans.
- Make an agreement with a collection agency.
- Find another cosigner.
Options to Consider Before Obtaining a Cosigner
To qualify for a loan, it’s likely you’ll need a cosigner. It’s always best, however, to refinance or insure a loan yourself (without a cosigner), but this would likely come at a higher cost. In this case, you obviously wouldn’t have to wonder what to do if a co-signer dies. But before obtaining a cosigner, think about what you would do if they pass away. Would you be able to:
- Look for an additional part-time job to help with payments or in case of wage garnishment?
- Refinance the loan, but additional credit costs can be quite high?
- Find an employer who offers tuition assistance (in case you’re a student) and would help back your loan or take repayments from your monthly salary?
If a cosigner dies, what happens to the loan? In most cases, you’ll likely need to renegotiate the terms of your loan agreement, to establish a new repayment or refinancing process. You could deal with a collection agency, or you could find another co-signer.
Most importantly, do your research before taking out any loan. Some companies offer more flexible agreements, e.g., contracts without an automatic default clause, and many other benefits.