If you’re expecting an inheritance, you may be wondering how long it will take to receive it. You might consider a probate loan if you need funds sooner rather than later. A probate loan, also referred to as an estate loan, allows you to borrow money against a future inheritance. Probate loans can allow you to access money that may be coming to you following the death of a loved one sooner, but there are some potential disadvantages to keep in mind.
You can also talk to a financial advisor about how to handle an inheritance.
Probate Loans Basics
A probate loan is a loan against an inheritance that’s due to you. You’re borrowing money today against assets that you expect to inherit tomorrow. Like other loans, probate loans must be repaid to the lender with interest, and you’ll typically make payments while the estate is still in probate.
Why do probate loans exist? Simply because probate — the legal process by which someone’s estate is settled after death — can take months to complete. In some cases, probate can take years if the deceased person’s heirs bring challenges against the will or otherwise dispute the distribution of assets.
Probate loans allow heirs to benefit from an anticipated inheritance without the lengthy wait. That may be appealing to heirs who need money to pay for medical bills, unexpected expenses or day-to-day living costs.
How Does a Probate Loan Work?
A probate loan is similar in structure to other loans, in that you borrow a lump sum and repay the money in installments. The lender can charge interest on the loan, along with fees. In most cases, the lender will expect the loan to be repaid in full once the borrower receives their inheritance.
The difference between probate loans and other types of loans lies in what’s needed for approval. While a probate loan lender might check an applicant’s credit score or income, the primary concern is the inheritance itself.
Lenders need to be able to verify that the applicant will receive an inheritance and the amount. Once that’s established, the lender can shape the loan terms, including the loan amount, interest rate and repayment schedule.
Loan amounts are usually a percentage of the inheritance. For example, you might be able to borrow up to 75% of what you expect to inherit. The interest rate on a probate loan can vary by lender but it may be typical of what you’d get with a traditional personal loan.
Probate Loan Advantages
The main benefit or advantage of getting a probate loan is that it allows you to tap into any inherited funds you expect to receive early. You don’t have to spend months or even years waiting for probate to conclude to start putting your inheritance to work.
Probate loans can be used to cover virtually any expense you choose, which could make them a good option if you need to pay for things like:
- Home repairs or improvements
- Higher education expenses
- Medical bills
- Emergency expenses
You might prefer a probate loan to other loan options, such as a home equity loan or personal loan. While home equity loans can put a lot of cash in your hands, depending on how much equity you have, they require you to use your home as collateral. Personal loans also allow for flexibility, but you might not be able to borrow as much as you could with a probate loan.
Probate Loan Disadvantages
Probate loans can offer convenience, but they can also be problematic for certain borrowers. For instance, having to make monthly payments toward the loan while you’re waiting for probate to wrap up could place an additional strain on your budget.
A probate loan can be an expensive way to borrow if the lender charges a higher interest rate or tacks on steep fees. A general lack of regulation around these loan products means that borrowers must tread carefully and do thorough research in order to find a reputable lender.
Taking out a loan against your inheritance can also be less than ideal if the estate you’ll inherit from is in dispute. For instance, say your parents pass away, leaving everything to you and your two siblings. Your parents had a will that specified you should get 60% of their assets, since you acted as their caretaker in their final years, while your siblings should get 20% each.
Your siblings decide to contest the terms of the will because they believe that your share of the inheritance is unfair. In that case, attempting to take out a probate loan could stoke the fire if the will contest created conflict between the three of you. You can ask a financial advisor about whether they think a probate loan is a good idea.
Probate Loan vs. Probate Advance
When discussing probate loans, you might also hear the term “probate advance” or “probate cash advance”. While they might sound the same, they’re actually two very different ways to borrow against an inheritance.
With a probate loan, you get a lump sum of money from your inheritance. You then make payments back to the lender in installments with interest, with the remaining amount due paid in full once the inheritance is paid out to you. Any leftover inheritance proceeds remaining after the loan is paid are yours to keep.
A probate advance is an agreement in which the lender purchases part of your inheritance. For instance, say you stand to inherit $100,000 from your parents after probate fees and other expenses are paid. You might enter into an advance agreement that allows the lender to purchase 40% of the inheritance.
You get $30,000 now and when probate ends, the advance company collects the $40,000 it purchased, plus the original advance amount and its fee. Any remaining inheritance funds are paid to you. If your inheritance turns out to be less than expected, you wouldn’t have to pay anything back to the advance company.
How to Get a Probate Loan
If you’re interested in getting a probate loan, you can start by searching for lenders that offer them. You typically won’t find probate loans at a bank or credit union. These loans are usually offered by companies that specialize in inheritance financing.
As you’re shopping around for a lender, it’s important to consider:
Once you find the right lender, you’ll need to provide them with some information about you and the inheritance. The lender will verify the inheritance amount in order to determine if they can help you. If so, you’ll need to fill out an application for the probate loan.
Assuming that you’re approved, you should have a chance to review the loan terms and details. If you agree to the loan terms, the lender will provide you with funding, which you can start using right away. In the meantime, you’ll need to make payments to the lender as specified by the loan agreement.
The Bottom Line
Probate loans can be an attractive way to borrow against an inheritance, but it’s important to consider the pros and cons. You may appreciate being able to get money today if you need it, but there may be trade-offs you’re making in the long term. If you’re considering a probate loan, it’s a good idea to compare lenders to see what kind of loan terms you might qualify for. It’s also wise to be clear on whether you’re getting a probate loan or a probate advance, as they don’t work the same way.
Estate Planning Tips
- Inheriting money can raise questions about how to make the most of those assets. It can be helpful to talk to a financial advisor about the best ways to use an inheritance, which might include paying off debt, funding an early retirement or covering college expenses for your children. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Have you started planning your own estate yet? If not, there’s no time like the present. The most basic element of any estate plan is a last will and testament. If you don’t have a will, you can create one using an online will-making software program. You may want to talk to an estate planning attorney if you have a more complex financial situation or if you think you might need to create a trust along with a will.
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