You are happy to help a good friend, partner or family member get rid of that loan . You can pay the costs for this yourself, but the other person barely makes ends meet. Yet it is important to arrange this properly. In this article you can read how these ways work in practice and what you should take into account.
Take over debt
There are roughly four ways to take over someone else’s loan:
- Repay the total debt in one go at the bank or creditor
- Transfer the monthly installments to your name
- Give the other person money at once or in installments, so that the other person can pay off the loan
- Transfer the debt to another bank
Please note: The Tax Authorities regard taking over someone else’s loan as a gift. The other party then pays gift tax if you pay off more than the exemption in a year. The rate he or she pays depends on your relationship. So always check the exemption and the rate that applies to you.
Takeover loan – Repay the debt in one go
If you choose this option, it is important that you first check a number of things at the bank or creditor. First of all you request a statement of the total outstanding debt including the interest that still has to be paid. That way you know for sure that you really pay off everything. The bank or creditor makes it no further problem that you pay off the debt instead of your friend or family member.
However, sometimes banks charge a penalty interest if you pay off a loan earlier than planned. For a revolving credit or overdraft this never applies, but it does for a mortgage or personal loan. So always ask yourself whether you can pay off without penalty. With this option, keep in mind that with a large repayment you quickly exceed the annual gift tax exemption.
Take over loan – Define installments by name
But you are not always financially so spacious that you can pay off everything at once. Most banks do cooperate in taking over the loan from someone else, but they do check whether the repayments fit in with your financial situation. If it is not a loan from the bank but a different debt, then you have to check whether you can put the repayment in your name. Whether this is allowed, of course, depends on the creditor.
However, the other person always remains liable for the loan. If you stop making repayments, the bank or creditor will come to him or her.
Take over debt – Pay for another
Of course you don’t have to put the loan in your name to help. By regularly giving money for the repayment you also help with the repayment. Don’t forget to report any amount you give for the repayment to the Tax Authorities for gift tax.
Take over loan – Transfer
Finally, you can take out a new loan with the same or a different bank to repay the other person’s loan immediately. You then retain the loan you take out, with the conditions that apply. The other hereby loses all liability, which you take over completely.
Keep in mind that you may be confronted with a penalty interest on the old loan and that you will soon go beyond the gift tax exemption. It also depends on your financial situation whether the bank accepts your request. The bank always checks whether you can actually repay the new loan.