There’s a lot to consider before taking out a finance agreement, as we have discussed previously. But one of the things that almost no-one considers before taking out car finance is: “What would happen to this car finance agreement if I should die before it’s paid off?”
Yet it’s an important question, with potentially serious implications for your loved ones. We regularly get questions from readers who have had a loved one die, wanting to know what to do about their car finance – and, unfortunately, this has been increasing in recent weeks thanks to the coronavirus pandemic. So it’s worth understanding what would happen if the worst should occur.
A time of bereavement is obviously difficult enough already, without having to deal with a finance company demanding payments. The current lockdown situation across the UK makes simple arrangements even more complicated, so hopefully the following information will be helpful in understanding how it works and what will happen.
Your car finance debt does not disappear after you die
Many people assume that any debts would be written off after they die, but that’s rarely the case. And when it comes to a car finance debt, the finance company is still entitled to its money back.
If you have a personal contract purchase (PCP), hire purchase (HP), personal loan or any other kind of borrowing to finance your car, that debt remains payable even in the event of your death. However, the right way to deal with that debt is different depending on the type of finance product you have.
A lease is different again, as you are not borrowing any money and are simply renting the car. A car leasing agreement will have early termination penalties that apply for ending a lease early.
Who is responsible for your car finance debt after your death?
This depends on the type of finance and how it was taken out.
If you have a guarantor, they will become responsible for the finance agreement, just as they would if you were unable to make your monthly payments.
If you took out a joint agreement, which is quite common for a personal loan situation, then the other person becomes fully responsible for paying off the debt.
In most other cases, your debt will become part of your overall estate after your death. If you have a will, your nominated executor is responsible for managing your financial affairs, including your car finance debt.
If you do not have a will, an administrator will be appointed – usually a next of kin. This can get very messy, so make sure you write a will and appoint an executor!
How is your car finance settled after your death?
For whoever is in charge of the estate, the process for settling the debt will become part of managing all the expenses of the estate. This also includes loans like your mortgage and other debts, and costs like funeral expenses and any outstanding bills.
If the finance was on a personal loan, which is an unsecured loan, then the car is the property of the estate. If necessary, it can be sold to help pay off the car loan or any other debts.
Because the finance is not secured against the vehicle, the executor/administrator is free to decide what to do with it. If it’s not necessary to sell the car to settle the finance, they could give the car to your next of kin or sell it via whatever means they choose. This means that the car could be sold privately, sold directly to a trader or sent to auction. It all depends on whatever the executor decides is likely to get the best sale price for your estate.
Secured loans include a personal contract purchase (PCP), hire purchase (HP) or conditional sale. In this situation, the vehicle is not your property and belongs to the finance company until the last penny is paid off.
The executor of the estate is able to settle the outstanding debt and keep the car if there is enough money to cover the settlement figure in the estate. However, more often that not, this won’t be the case – especially if there are other large bills that also need to be paid.
Usually, the finance company will take the vehicle back and sell it at a trade auction. Whatever it earns at auction (after auction fees) is taken off your debt. If the selling price is enough to cover your debt, then the finance is settled. Usually, however, the selling price does not cover the total debt, so your estate will still owe the finance company whatever is still outstanding.
Another option with a secured loan is for the executor/administrator to enact a voluntary termination of your finance agreement. This requires you to have repaid more than 50% of the total amount payable, which you may have already done. If not, the executor can pay whatever is needed to bring the total paid up to the 50% point. The car is collected by the finance company with nothing further to pay, assuming you have complied with the normal conditions of voluntary termination.
With a lease agreement, such as personal contract hire, there is no debt because you have not borrowed any money. It’s simply a rental contract for X months at £Y per month. However, all lease agreements will have early termination charges. These apply regardless of the reason for the agreement being ended early – even if you die. They should be set out clearly in the lease contract, so take note.
The leasing company will take its car back, but the executor may still have to settle any penalty fees for terminating the agreement early. These fees can be quite substantial, which is an unfortunate reality of leasing a car.
What if there’s not enough money to settle my car finance debt?
The finance company will expect your estate to pay off the settlement figure for your debt. It will provide the exact debt amount to your executor/administrator. However, with all of the other expenses associated with settling your finances, it is entirely possible that there might not be enough money to go around.
There’s nothing to stop the executor or administrator negotiating a settlement with the finance company for a lesser amount than is owed. If it’s a choice between taking legal action (which offers no guarantee of getting their total debt back) or taking a reduced settlement, the finance company may be prepared to take a percentage of the total and write off the rest. This is something that should be done in conjunction with professional legal assistance.
Dealing with the death of a loved one is a difficult enough time already. It’s even harder if you have a car finance company circling like a vulture, wanting payment for an outstanding debt. If you’re taking out car finance, make sure you understand the potential implications of your debts on your family or loved ones if you should die.