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Do Banks Do Inheritance Loans: Everything You Need To Know

Inheriting money or property from a loved one who has passed away can come with difficult financial decisions. While an inheritance may seem like a windfall, there are often expenses associated with settling an estate that need to be paid. This is where an inheritance loan from a bank may come in handy.

What is an Inheritance Loan?

An inheritance loan, also sometimes called a probate loan, is a type of unsecured personal loan offered by some banks, credit unions, and online lenders. It allows someone who is expecting or has recently received an inheritance to access a portion of the inheritance funds before the estate is settled.

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Specifically, an inheritance loan allows a beneficiary to borrow against the expected value of their inheritance while the executor finishes processing the paperwork, taxes, debt payments, and other details involved with wrapping up an estate. The funds from the loan can be used for a variety of expenses like paying off debts, home repairs, medical bills, or everyday living costs until the full inheritance is received.

How Do Inheritance Loans Work?

The basic process for obtaining an inheritance loan is as follows:

1. Apply for the loan. Most lenders will require documentation showing that you are the beneficiary of an estate, as well as estimates of the expected inheritance value.

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2. Undergo credit and background checks. Lenders will review your credit report, income, debts, and other financial details to evaluate repayment risk.

3. Receive loan approval and funding. If approved, the loan proceeds are deposited into your bank account within a few business days, usually via direct deposit.

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4. Begin repayment. You’ll receive monthly statements and are responsible for making fixed interest-only or full principal and interest payments on schedule using the agreed-upon repayment terms.

5. Receive inheritance and use it to repay the loan. Once the estate is settled and you receive your inheritance distribution, those funds must go towards fully repaying the outstanding inheritance loan balance.

The loan is considered “non-recourse,” meaning the lender has no legal right to collect beyond the value of the inheritance if the borrower is unable to repay. However failing to use the inheritance to pay off the loan as promised could damage credit and complicate future borrowing.

Inheritance Loan Terms

Inheritance loans tend to have higher interest rates than traditional unsecured personal loans due to increased risk for the lender. Here are some typical terms to expect:

  • Loan amounts: Most loans range from $5,000 to $250,000 or more based on the estimated inheritance value. $50,000+ is common.
  • Interest rates: Variable annual percentage rates (APRs) of 10-30%, depending on credit profile and loan size. Lower credit scores may pay much higher rates.
  • Repayment terms: Interest only or full principal/interest monthly payments for 6-18 months. No penalties for early repayment if inheritance arrives sooner.
  • Origination fees: Upfront fees of 3-5% of the loan amount are typical. Some lenders waive these fees.
  • Prepayment penalties: Generally not charged as long as the full loan is repaid using inheritance funds as agreed.
  • Documentation: Lenders require copies of wills, trust documents, and estate valuations. Some also verify the status with executors/attorneys.

Borrowers receive lump sum disbursements and retain flexibility with repayment timing, making inheritance loans preferable to some alternatives like personal or business loans, which often stipulate usage restrictions. Still, rates remain high, so they aren’t necessarily the most cost-effective option.

Pros and Cons of Inheritance Loans

Like any financial product, inheritance loans come with advantages and disadvantages to weigh carefully:

Pros:

  • Immediate access to funds. Borrowers can receive loan proceeds within days vs. months or years tied up in probate.
  • Flexibility with repayment. Loans are repaid in full using inheritance rather than strict payment schedule penalties.
  • Non-recourse debt. Lenders can’t pursue borrowers beyond inheritance value if they are unable to repay the balance.

Cons:

  • High-interest rates. Rates tend to range from 10-30%, much higher than traditional unsecured loans.
  • Origination fees. Upfront fees of 3-5% take a chunk out of the loan amount.
  • Impact on estate settlement. Borrowing against future inheritance could delay the closure of the estate or incur costs if the loan isn’t repaid timely.
  • Tax implications. Loan proceeds may be taxed as income; using inheritance to pay back a loan may incur estate/gift taxes. Consultation with a financial advisor is recommended.
  • Alternatives exist. For some, personal/business loans, credit cards, or even waiting for the inheritance may carry lower interest or fewer costs.

Overall, inheritance loans are best suited to covering emergency situations or time-sensitive costs rather than wants or luxuries, given the tradeoff of high interest paid. Patience and exploring alternatives may be wiser options depending on individual circumstances.

Alternative Options to Inheritance Loans

While inheritance loans provide a convenient source of funds, they aren’t the only way to access cash prior to settling an estate. Some better alternatives include:

Personal or Business Loans

If you have a strong credit history, traditional unsecured personal loans from banks or credit unions may carry much lower interest rates compared to inheritance loans – perhaps 5-10% APR. Business loans could also be an option if you own a company.

Home Equity Line of Credit (HELOC)

For homeowners expecting an inheritance, a HELOC secured by home equity grants fast access to a revolving line of credit with variable rates often below 10% APR and no origination fees. Payments aren’t due until the HELOC balance is paid off.

Credit Cards

While carrying high interest relative to other debt, credit cards don’t charge origination fees and provide flexibility with $5,000+ limits. Pay statements in full each month and avoid interest charges if possible.

Family/Friend Loan

Explaining your situation, someone close may be willing to provide an informal, lower-interest personal loan as a favor to help you through until the inheritance arrives. Agree upon clear terms in writing.

Reduce Expenses, Dip into Savings

For less urgent needs, try budget cuts and using emergency savings or investments as a temporary bridge rather than taking on potentially expensive debt that isn’t absolutely necessary.

Wait Patiently for the Inheritance

If at all feasible based on your financial circumstances, allowing the estate to settle fully before accessing funds avoids interest costs. Probate often takes 6-12 months in many states.

Thoroughly research all accessible credit options before pursuing an inheritance loan to ensure it truly provides the best terms for your needs over alternatives that may carry lower borrowing costs. Consultation with financial professionals can also help with key decisions.

Inheritance Loan Application Process

If none of the above serve as viable substitutes and you decide an inheritance loan aligns best with your needs, here are the common steps to obtaining one:

1. Gather Documentation

Typical requirements include:

  • Photo ID
  • Proof of beneficiary status (will/trust)
  • Estate valuation estimates from executor/attorney
  • Income/asset verification like pay stubs, bank statements

2. Complete the Online Application

Most lenders offer fast, easy-to-complete web forms asking basic questions about your situation, ID, income/expenses.

3. Undergo Review and Credit Check

Lenders analyze submitted details, pull credit reports, and verify all information to evaluate risk.

4. Receive Loan Terms

If approved, loan agreements are sent listing rates, fees, and repayment conditions for review and agreement acceptance.

5. E-Sign Docs and Get Funding

Sign loan paperwork digitally, and funds are deposited into your bank account through direct deposit, usually within 2-5 business days. Wire transfers are also common.

6. Begin Loan Repayment

Using the inherited funds as received, start making monthly interest or principal/interest payments as set in the loan agreement.

The process aims to grant fast funding within 1-2 weeks once applications are submitted complete with the required documents. Pre-approval through informal inquiries allows borrowers to gauge terms before fully committing.

Frequently Asked Questions about Inheritance Loans

Here are answers to some commonly asked questions:

1. What happens if the estate is worth less than expected?

Suppose the actual inheritance payout ends up lower than initially estimated. In that case, borrowers are only required to repay the loan using the actual funds received—no additional money is owed beyond the inheritance value. Lenders accept this non-recourse risk when approving the loan.

2. Can I use the loan money for any purpose?

While loan proceeds provide flexibility, funds shouldn’t be spent frivolously and should generally align with intended estate settlement and related expenses rather than non-essential personal uses. Lenders reserve the right to revoke loan approval or accelerate repayment if they feel the money is being misused in a way that increases their risk. Common appropriate uses may include paying debts, medical bills, home or property repairs, or basic living costs until the inheritance arrives.

3. Do I need good or perfect credit to qualify?

While strong credit isn’t required due to the non-recourse nature of inheritance loans, applicants with fair-to-good credit (scores 640-679) still have a decent chance at approval but will likely pay higher interest rates. Rates increase substantially for those with scores under 640, and some lenders may deny applicants with poor credit histories altogether due to the heightened risk of default.

4. What happens if the executor or other heirs contest the will?

Suppose any legal challenges arise regarding the beneficiary status or expected inheritance amount. In that case, lenders will generally allow loan terms to remain unchanged unless issues cause the payout to be delayed significantly beyond original timelines. In rare cases of lengthy court battles rendering inheritances uncertain, the loan may need to be refinanced or renegotiated depending on the situation.

5. Are there penalties for early repayment using inheritance funds?

No prepayment penalties apply to inheritance loans as long as the full balance is repaid using the disbursed inheritance funds as stated in the original loan terms. Borrowers retain the flexibility to pay off loans early without fees if estate settlements are finalized sooner than anticipated.

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