Loan agreement needed?

hollymcr

I am planning to take out a 0% card to pay off the card debts of a member of family, who is stuck on high card rates without a decent credit rating to change it. I have also lent the same member of family a few smaller sums of money. In total the debt will be around £10k.

What do I need in terms of a loan agreement in order to protect myself as best I can?

My main concern is what happens if they are run over by a bus, so to speak. I would want in that case to make sure that any debt is repaid out of their estate, and that it wouldn't be subject to tax.

Other info: There's no plan to charge interest, and it is possible that additional small sums would be lent after the agreement was drawn up; repayments will be pretty flexible (what they can afford to pay when they can afford to pay it). All the normal "never lend to friends or family" alarm bells have already rung and been silenced; we've already decided to help and it's only really now a question of loan or gift. There are loads of risks we can't avoid (eg they can never afford to pay back the loan). This is about dealing with ones that can be dealt with; if they die I don't want to be left paying off the debt using whatever I may otherwise inherit from the estate (which may well not cover the debt).

somethingcorporate

Are they close to death? I don't think in this situation unnatural death is much of a consideration. I'd be concerned about getting your money back whilst they are still alive.

hollymcr

Lets just say they're a lot older than I am....

Getting the money back while they're alive I can deal with; there are several details which aren't relevant to the original question but mean that the affordability of the loan in the medium term isn't an issue, but at the moment for every £200 paid off the loan £160 of it is interest and in the short term paying that minimum payment is causing knock on effects.

Neither the member of family or I relish the situation this puts us in but sometimes you have to pick the best of available options, putting out of your mind that you wish there were better options on the table....

However, if they die then the existing debts will come out of their estate before anything left over gets shared out. I'm just trying to make sure that remains the case if I become the lender.

somethingcorporate

Then how about get them to write their will to include a repayment to you of X if they die.

hollymcr

somethingcorporate wrote: »

Then how about get them to write their will to include a repayment to you of X if they die.

A few reasons, although you may be right that this is the best option. But:

• Changing the will requires solicitors and I believe that this could equally be achieved through a free loan agreement.
• The value of the loan will obviously decrease over time as it's paid off, so putting a fixed figure into the will won't suffice; if the will refers to "whatever is left on the loan" then I can't see how that would work unless the loan is formalised (in which case I'll need a loan agreement)?
• I would potentially be liable for inheritance tax on the repaid loan (I don't think we'll be anywhere near tax thresholds so this is a theoretical one).
• Any subsequent loans would require more changes to the will, rather than just amendments to the loan agreement (or additional loan agreements).
• A loan agreement would be "easier" to arrange; I draw something up, we both sign it. A change to the will requires a lot more work and would almost certainly not happen even though the loan still would.

It may be the case that any formal loan agreement would suffice; unless it says that it is written off on death then I would have thought it would by default be a debt on the estate anyway, but that is just guesswork on my part.

I already have a sample loan agreement that I found online, but it makes no reference to death. All I really want is one that refers to it, or confirmation that it doesn't need to.

4Chickens

Hollymcr

You say your relative will be paying you back what they can afford, when they can afford it. Well to be honest, what I think I can afford and what YOU think I can afford are likely to be significantly different amounts.
Don't lend them the money, just give it to them as a gift. This will save you alot of hassle chasing the debt for years and years and years to come after the your relationship with them has broken down, they have !!!!!!ed off and are tapping up another relative for another £10k
OR
you could take them to the CAB or put them in touch with one of the debt charities that are recommended so frequently on here.
I don't mean to sound harsh but it would take alot more than a bleeding heart story of a high interest rate to make me part with £10k of my hard earned money.
Good Luck with whatever you decide

bargainbetty

What will happen if the debt is not repaid before the 0% period expires? If you are unable to tart the money over to another card, you will be liable for interest - will the person cover these interest costs that you are incurring on their behalf?

To formalise a loan agreement it needs to be a formalised agreement. That means regular repayments (not as and when) with a fixed statement of what will happen at the end of the 0% periods, allocation of estate etc. A will can stipulate that the loan agreement is valid under the terms of the agreement and the amount shown as outstanding on an annual statement will be classed as a debt of the estate.

However, if the person has an estate of sufficient value to cover the debt, why are they not liquidating their assets to cover their own debts? You are very likely to end up significantly out of pocket on this, should the worst happen.

At best, a formalised loan agreement between friends remains just what every loan agreement is - subject to a severe change in circumstance, but with the risk on you not them. If they defaulted on a bank loan, or dropped payments to £1 per month, they risk damaged credit files, defaults, legal action (although their repayments would have to be accepted eventually). In your case, you will have to spend your own money to get your own money back.

Honestly, I would rethink your decision. You have no guarantees. You have very little protection, without paying legal fees for agreements. You risk losing all of it, most of it. Maybe you would get every penny back, but ask yourself why the person is in the situation they are?

Did they overspend - if so, have they stopped? Do they gamble, drink or have an expensive habit? Has it stopped? Are they living within their means? What is their monthly budget, do they stick to it?

Work through all of this with them. If you just hand over the money without ensuring that they have dealt with the issues that caused the problems (and yes, I'm aware it might not be entirely their fault) then you are doing no more than bailing them out.

Surprisingly, that isn't the kindest thing to do....

hollymcr

Lots of points here (none of them really addressing my original post but hey, I understand why).

Should it be a gift rather than a loan? No, I don't think so. That doesn't do the recipient any favours, and in any case they wouldn't accept it. Would I enter into this if a gift was the only option? Yes.

If someone else were suggesting what I am suggesting would I back them or tell them to run a mile? I'd be with everyone else telling them to run a mile. However I'd also accept that everyone has to take their own personal circumstances into account.

In this case the reasons for the debts having built up have been addressed (and it isn't a case of a gambler deciding not to gamble any more, or anything like that). The only substantial problem remaining is that to get out of debt when 90% of every penny they pay out is just covering interest means that this will be a never-ending story unless we help out. Are we guaranteed all our money back? No. Is it even likely? Well yes, I think it is, provided they live long enough to pay it back or (which is why I posted here) if I have some cover in the event that they don't. If I thought that it wasn't likely, would I still help? Probably yes. It's a close member of family and our personal (non-financial) debt to them exceeds this loan.

I'm fine with "it's a bad idea, don't do it, but if you really must then here's the answer to your question" but at the moment I'm not getting close to the answer to my question. Does anyone know what status a loan agreement has when it comes to dealing with an estate? Do such debts get settled before any remaining funds are shared out amongst the beneficiaries or not?

somethingcorporate

I am pretty sure they do. The estate is totted up, then debts are settled, then funeral costs are removed and anything left forms the estate for the purpose of beneficiaries.

A quick 30 minute free session with a local solicitor maybe your best course of action.

hollymcr

somethingcorporate wrote: »

I am pretty sure they do. The estate is totted up, then debts are settled, then funeral costs are removed and anything left forms the estate for the purpose of beneficiaries.

A quick 30 minute free session with a local solicitor maybe your best course of action.

Thanks, that what I was thinking too. (I appreciate your comments further above too, much better I go into this with my eyes open.)