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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
Like other loans, probate loans must be repaid to the lender with interest. Unlike many traditional loans, however, repayment is typically made in a lump sum once probate concludes and the inheritance is distributed.
These loans are often offered by non-bank lenders and are generally not subject to the same consumer lending regulations, so borrowers should proceed carefully.
Probate loans exist because probate, the legal process of settling a person’s estate after death, can take months or even years to complete. Delays are more likely if heirs challenge the will or dispute how assets should be distributed.
Probate loans allow heirs to access an anticipated inheritance without waiting for probate to end. That may appeal to heirs who need money to cover medical bills, unexpected expenses or day-to-day living costs.
How Does a Probate Loan Work?
A probate loan is similar to other loans because you receive a lump sum that you repay with interest. The lender can also charge fees. Many probate loans do not require monthly payments. Instead, the balance, interest and fees are typically repaid in a lump sum once probate concludes and the inheritance is distributed.
The difference between probate loans and other types of loans lies in the approval process. While a probate loan lender might check an applicant’s credit score or income, the primary consideration is the inheritance itself.
Lenders need to verify that the applicant is entitled to an inheritance and estimate its value. Once that’s established, the lender can determine the loan amount, interest rate and repayment terms.
Loan amounts are usually a percentage of the expected 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, though it may be comparable to the rate on a traditional personal loan.
Borrowers should be aware that if estate taxes, debts or legal fees reduce the value of the estate, the remaining inheritance may not fully cover the loan.
Probate Loan Advantages
The main 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 borrowing options, such as a home equity loan or personal loan. While a home equity loan may allow you to borrow a substantial amount, it requires you to use your home as collateral. A personal loan may offer more flexibility, though you may not qualify to borrow as much as you could with a probate loan.
Probate Loan Disadvantages
Probate loans can provide quick access to cash, but they also have drawbacks. Although some probate loans require monthly payments, many are repaid in a lump sum after probate ends.
A probate loan can be an expensive way to borrow if the lender charges a high interest rate or substantial fees. Because probate lenders are often not regulated in the same way as traditional banks, interest rates and fees can vary widely, and some borrowers may encounter predatory lending practices.
Taking out a loan against your inheritance can also be less than ideal if the estate is in dispute. For example, imagine your parents leave 60% of their estate to you because you cared for them during their final years, while your two siblings each inherit 20%.
If your siblings contest the will because they believe the distribution is unfair, applying for a probate loan could add to the conflict while the estate is still being settled. A financial advisor can help you decide whether borrowing against an inheritance fits your financial plan.
Probate Loan vs. Probate Advance
When discussing probate loans, you might also hear the terms “probate advance” or “probate cash advance.” While they sound similar, they work differently.
With a probate loan, you receive a lump sum and repay the lender with interest. Repayment is typically made after probate ends and the inheritance is distributed. Any remaining inheritance proceeds belong to you.
A probate advance is an agreement in which a company purchases part of your inheritance. For example, suppose you expect to inherit $100,000 after probate fees and other estate expenses. You might agree to sell 40% of that inheritance.
You receive $30,000 today, and when probate ends, the advance company collects the $40,000 it purchased. The difference between the $30,000 you receive and the $40,000 the company collects represents its fee. If your inheritance ultimately turns out to be smaller than expected, the terms of the agreement determine whether you owe anything beyond the assigned portion of the inheritance.
How to Get a Probate Loan
If you’re interested in a probate loan, start by comparing lenders that specialize in inheritance financing. You typically won’t find probate loans at a bank or credit union.
Be cautious, as many of these lenders are not regulated like traditional banks. Also confirm that the lender is authorized to operate in your state, if required.
As you compare lenders, consider:
- Loan amounts
- Repayment terms
- Interest rates and fees
- The lender’s reputation
Once you choose a lender, you’ll need to provide information about yourself and the inheritance. The lender will verify the expected inheritance to determine whether you qualify. If approved, you’ll review the loan agreement before receiving the funds. Depending on the loan terms, repayment may be due in a lump sum after probate or through another repayment structure specified in the agreement. In the meantime, you’ll need to make payments to the lender as specified by the loan agreement.
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 vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel 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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