Should relatives charge interest on loans (discussion at work today)?

[LostinVA]

ie close relatives charging their kids the same rate as a bank. A coworker's friend borrowed $10,000 from her father to pay off her student loans. He's charging her .5% less interest than the bank did. We were all rather appalled by this, except for one coworker, who didn't think it was a big deal. (FYI -- the girl's Dad had the extra money)

I'm from a family where, if you can afford it, you loan the money -- sans interest or a repayment timetable.

[Shell Beau]

1. I wouldn't do it. I can see trying to teach your child how the real world

works, but it isn't something I would do.

[LostinVA]

4. This is a 28-year-old woman

Single mom, has a FT job.

[Shell Beau]

6. Oh, yeah that is just weird to me.

I've never heard of anyone doing that either. Seems kinda harsh.

[LostinVA]

18. I know!

Are you charging your baby rent?!

[fizzgig]

2. my family is the same as yours

my dad wouldn't even think of charging me interest (i still owe him several grand and, bless him, i think he knows it's going to be a loooooooooooong time before he sees much of that money).

there's something kind of...well, icky, about charging family interest on a loan unless there are extenuating circumstances. not that i can think of any such circumstances.

[LostinVA]

19. Yeah, my parents even ripped up the check when I paid them back $1,700 for a transmission

I hated borrowing it, but I had to. It was about 15 years ago, and my Mom called and said,"I got the check in the mail today. Thanks! I just shredded it."

[Parche]

3. Hey

In the past when I had to borrow from my brother, I always paid him back, with
tons of interest!!

:hi: :hug:

[Swede]

5. Only if it is a life lesson.

If it's greed,well that just sucks.

[skygazer]

7. I don't see anything wrong with it but it's not something I would do

I sometimes think the reason people with money have it is because they are more frugal than other people (read - cheap). For instance, I work in a very rich town and our customers will argue for 2 hours over a perceived 3 cent price discrepancy.

But anyway, maybe the father sees it as a way to teach the daughter about loans.

[Schema Thing]

8. not if they're Muslim

[supernova]

9. My parents did this with my brother

They lent him about 10,000 IIRC when he first built his house in the 80s. They treated the entire arrangement like a loan, with payment schedules and everything. My brother even had to sign a book every month! And I do think the interest was less than he would have gotten at the bank. My parents did have the money at the time, but they were not wealthy by any means, just barely affluent.

My family is kinda wierd about borrowing money from each other anyway. I will certainly give money when someone needs it (without the expectation that they will pay it back), but I won't "loan" it. Just because of that whole scene.

I think in general, money exchanging hands within the family causes tensions that don't need to be there.

[Shell Beau]

10. That is kinda my idea. I will give money.

Loaning money to friends or family can get sticky.

[supernova]

13. Yeah, I felt bad for my brother

at the time too. I felt my paretns were treating him and his wife like children. But they were sorta in a bind because of course, the house was costing more than they had originally budgeted for. And their relationship was strained over it.

[DeepBlueC]

15. that money was your parents investment

If they had not loaned it to your brother, it would be collecting interest. That money was destined to protect your folks from what life can deal, inflation, illness, medical expenses, nursing homes. If it wasn't the better deal, your brother would have taken his business to the bank. Depending on where the money was invested your folks may have been taking a loss on the loan (probably were) and as it was probably unsecured, they took a huge amount of risk. Generally people who get loans outside the banks pay MORE in interest as they usually cannot qualify for the bank loan. It sounds like they did him a favor and the problem is that it was not a big enough favor. No good deed goes unpunished.

You want to see family tension, loan money that is to be paid back "when you can manage it". What happens if the lender has needs that come before the loan can be "managed"? Does the loan go on for how many decades? What priorities will come before managing to retire the debt? The lender might not agree. The lender has a right to know how much the good deed will cost him and when he can count on seeing his money back. If your brother didn't like the terms, he could have gone to someone whose arrangements he found more congenial.

[petronius]

16. Good answer. When it comes to family, I think it's best to either give the money

or else be very formal about it (as in the OP). There've been a few of those 'whenever' type loans in my family, and it's usually not a good thing.

(However, we had one case where the recipient didn't keep track of how much they'd paid back, and the lender didn't either because they didn't really expect to see any of it. The borrower got in the habit of making payments, and we're pretty sure the lender made a profit... :rofl:)

[MsTryska]

11. usury is a one-way ticket to hell my friend...

but i can see where he is teaching her a lesson. or trying to.

What i don't get is why she didn't jsut stick with the bank in that case. if she thinks Daddy's not gonna charge the interest, she'll be sorely mistaken.

[flvegan]

12. Depends of if the money is "extra" money

and not earmarked for retirement, etc. I think fair is to cut the interest a great deal, but still charge something. That way, the money stays in the family and makes up for an unrealized loss to the lender (interest that could have been gained in a CD, etc).

For example, if I loaned my kid $10k to payoff a loan that was at 7%, I'd ask for 2%. I'd actually be pocketing 3.5% because I wouldn't claim it on my taxes hence ditching any capital gains I'd otherwise have to pay on it.

That said, if my kid was in really tough straits, I'd not charge interest. But if it's a loan for convenience and a lower rate, I think the rate would be fair because it's business.

[DeepBlueC]

17. in the end few people have "extra" money

If it is your own you are unlikely to think of it as "extra". If you don't have enough of your own, someone else's is very likely to look "extra" to you.

You can't really "earmark" money for retirement and dispose of the rest because in fact you do not know what retirement will cost. Inflation is unpredictable, catastrophe eats up reserves as does illness. When you are dead you don;pt need it. Up until then it might come in handy. It might be essential. And it still might not be enough.

[philosophie_en_rose]

14. Nope.

I don't think it's abusive at all, but it seems strange to me. I don't know how I feel about making a profit from family.

[hippywife]

20. But

if they had to take the money out of an interest bearing account or incurred a penalty for withdrawal to make that loan, then they may not be making a profit.

[philosophie_en_rose]

23. I personally wouldn't charge interest.

I could use the money to do any number of things that might be lucrative in the future. If someone else wants to charge interest, that's up to them. However, I don't like the idea of financial wrangling with family members. (Though it might be necessary in cases). I'm not going to worry about interest, if I can help it.

[DeepBlueC]

29. It may well be a loss, not a profit

If that money were not lent out to family, it would certainly have been earning interest in some other investment vehicle, very likely one that offered a better return on investment than a loan to family at a preferential interest rate, and, as an unsecured loan, a huge amount of risk. The money that has been borrowed is, in effect, the amount that the principal would have grown to by the time the loan is paid back. I doubt that the parents expected or got that full amount. I think it is reasonable not to lose big while making a loan. As long as it is called a loan, the lender shouldn't end up on the short end of the stick.

[philosophie_en_rose]

33. I don't think of it as a business arrangement.

The "loss" that you describe is the lost profits from investing the money in something else. I'm comfortable making a profit from a bank or credit union. I'm not that interested in making money from family members. There are any number of investments I could make. I'm not going to charge my family for the hypothetical lost opportunities.

[LostinVA]

36. Almost word for word what I said yesterday!

It's one thing PAYING interest because like you feel it's the right thing to do, but (to me) it's another thing haven't a close relative write up a contract and charge interest -- unless it's very nominal interest like Flvegan said.

Maybe it's just my Irish/Sicilian heritage thing, but I KNOW it would freak out any of my family members if they heard someone did this. Kind of like they would freak if any of us had a cash bar at our weddings! Family looks out for family.

[DeepBlueC]

50. not everyone can afford to think that way

And the lost opportunities are not hypothetical unless the ten thousand comes from a box under the bed. Usually amounts like that come out of an interest-bearing vehicle. Thanks to the miracle of compound interest, ten thousand dollars over ten years earns a substantial amount of money and to make an interest-free loan of that amount is a straight-up loss.

What with inflation those dollars lent today are losing money every day anyhow so you pretty much have to get some interest from your assets just to try to hold its original value.

A few hundred until the end of the month is quite a different matter than 5 or 6 figures over a decade or more.

Managing the money you can put away when you have enough to do so can best be appreciated when your ability to keep putting it away is abruptly snatched away by death of a spouse, disability, your own or your child's, or any of the myriad of catastrophes that befall people every day.

If you are young and making some good bucks and not lending out money you can't afford to lose, go for it. If you are dipping into your nest egg, I think you have to be very careful.

[Gormy Cuss]

21. Having loaned money with no interest or repayment sked, I would never do the latter again.

I don't want family's interest money even if I'm losing out on my own interest, but I also don't want to be the Family Bank. So far all but one relative has paid me back and only one other really had screwed up priorities about repaying the loan.

[cboy4]

22. The times I had to borrow money from my parents, they

never cashed my pay back checks.

I felt kinda bad.

NOT!

It reminded me of the Seinfeld episode where Kramer finds Jerry's old birthday checks from his grandmother and insists he deposits them, which put Nana in unexpected debt.

[doc03]

24. My parents had no money to lend, for my first car my

dad co-signed a cash loan from a Bank for $300. I have loaned my younger brother (alcoholic) thousands of dollars and never received on cent in return. Finally the (last) time he was arrested for DWI I didn't bail him out and let him sit in jail for 2 weeks waiting for trial. Since then he has never been stopped for drunk driving and has never asked me for money again for about 5 years now. So I think you should charge family members interest, after all that money would be earning interest if it was invested. I think it teaches them responsibility.

[AirmensMom]

25. My mom charges 10% interest.

I think it's appalling. If I could afford to help my kids, I'd just give them the money. Wait ... I do help my kids when they need it. No repayment necessary.

[DeepBlueC]

30. Don't like the terms?

Don't make the deal.

[AirmensMom]

40. Right.

She didn't happen to mention the interest until AFTER the deal was made. :eyes:

[DeepBlueC]

45. then no deal was made

and it is the responsibility of BOTH parties to discuss how the loan will be paid back, under what schedule and in what time frame and at what interest, if any. A loan of a hundred bucks to be paid back at the end of the month is a different matter than a loan of 10 thousand to be paid back over 10 years. If you don't ask before you give or take the money you are just asking for trouble and it seems that is just what you have got.

[AirmensMom]

47. Uh-huh.

When your mom says, "Don't worry, you can borrow the money from me" when your life is falling apart because some asshole tries to take you to the cleaners, you sort of maybe think your mom wants to help. Yeah, we should have asked about interest, etc. Clearly, you haven't experienced that level of stress in your life. I'm so happy for you!

And, FWIW, we repaid it immediately and decided to take our chance with the assholes, with legal help (of course). We could lose our shirts and everything we own, but at least I know my mom would help for 10% interest and some smug DUer out there knows not to make any of the mistakes some of us have made.

[DeepBlueC]

51. I've been the dumb lender, myself

I'm out a substantial amount of money, am now disabled myself, and my neighbor who is always in a jam of her own making is still borrowing from other people and avoiding me because she owes me money. It would be nice if she could drop by and ask me if I could use some help (I can), kind of as interest on a principal I will never see, but that is a pipe dream.

My own mom does not ask for money back,fortunately, mostly because neither of us has very long to live. So we're lucky there.

[AirmensMom]

52. I guess you can get taken

from either side.

I am disabled too, and can relate to that part. Yes, it would be nice if your neighbor would offer to help. I wonder if she's ever thought of that.

[LostinVA]

37. Good God -- that's more than the bank!

[AirmensMom]

41. She swore up and down

that's what her investments were paying. But any other day, she complains about her poverty level. Dad left her with NOTHING to worry about -- great health insurance, income for life, etc. She's one of the "I've got mine, tough for you" crowd.

[LostinVA]

42. Man -- as I said, all families are different

In my family, your Mom would be the relative everyone whispered about at weddings, etc.,"Did you here what she did to her kid?"

[AirmensMom]

43. For sure.

Mine has always been ... uh ... never mind. :P



:hi:

[Danger Mouse]

26. No.

[Monk06]

27. If Al Capone had gone into the banking business rather than the liquor business

He would have ended up in the US Senate rather
than Alcatraz. He would still have been a crook.
He just wouldn't have gone to jail.

Parents who treat their kids like banks treat their
customers are a little creepy IMO.

[LostinVA]

38. You're right about Capone!

I think it's a little creepy, too. But, all families are different, I guess.

[1]

28. not only charge the vig, but if the payment is short it is added to the principal...

eventually we "bust out" the child.


:rofl:

i'm kidding, of course...

[ThomCat]

31. I think families should give money if they can afford it.

Loans often only cause trouble. :(

Maybe I'm weird for thinking this. I never loan money, but I've been known to share it pretty freely when there has been need.

[AlCzervik]

32. i agree, and if i can afford to give it i'd rather do that than loan it.

[LostinVA]

39. Judge Judy basically says that

That, relatives should either NOT give money to someone, or just give it to them -- and, if you get repaid, good, if you don't, then never give that person money again.

Judge Judy is bonkers, but I agree with her on some of her family law stuff.

[pitohui]

34. well in my experience the friend/family member won't repay the loan anyway so the point is moot

i will never again give a loan to a friend or family member because the minute i do i am demoted from friend/family member to "sucker" and am never communicated w. again

giving a loan is a great way to get rid of someone you can't stand, for they will avoid you forever after, but it's pretty expensive

yes, clearly, the person giving the loan SHOULD charge interest but who among us does this? we are too invested in our ego and our self-puffery of ourselves as good martyrs to charge interest for our loans so we get what we are asking for when we're ripped off

if you love someone and want to be their equal you don't loan them money because once you become their lender you have spoiled the relationship

loan money only to people you don't care about, so that you can properly collect on the debt later or if you're too shy/lazy/timid to collect the money at least you're not so bothered that you were ripped off and will never see your debtor again...

[undeterred]

46. "loan money only to people you don't care about"

:eyes:

[Forkboy]

35. Jesus...that's horrible. Nothing says love like 5% interest.

Kind of funny in a way though, too. :silly:

[Coyote_Bandit]

44. Well from a legal and tax perspective

a loan made without charging interest is considered a gift to the extent that no interest is recouped. And the whole thing can be considered a gift if the principle is not recouped. In some estate tax planning scenarios gifts and thus principle and interest payment might be a consideration.

A family member who would expect to borrow money without including interest in the repayment is expecting to be given the use of the money. All financial returns are defined in time value of money. Since returns are exponential, the long term effect of foregoing return is more significant than the short term return.

I've got no problem with charging interest on a loan - even on a loan to a family member. If I were to loan a significant sum of money there would be a document indicating agreement to the laon terms - including interest charges and a repayment schedule.

A financial transaction that is conducted in a business like manner is an arrangement that is difficult for sibling and other family members to take offense at. A large interest free loan without a repayment schedule might imply that other siblings and family members are thought less of - and those siblings and family members might well come seeking their own loans and gifts.

The girl has a good deal. A slightly lower than market interest rate. And a lender without the motive and resources to act in a predatory manner.

[PassingFair]

48. We borrowed money from my husband's aunt to buy a house.

She charged us 10% interest (about the going rate)
back in 1989.

The house we were buying only cost $12,000 (a steal)
and banks weren't interested in loaning us only
10 or 12 thousand without charging us $2,000 in
FEES (!), claiming that the loan had to be structured
like a regular mortgage.

We made all of our payments to her, and she made
more interest than she could have made in CD's or
whatever, so it worked out for everyone.

[Left Is Write]

49. It depends on the circumstances and the family dynamic.

My husband and I borrowed some money from his parents a few years ago, and they charged a modest interest rate (less than the bank rate on a personal loan). A couple years into it, my FIL decided to drop the interest charges, saying it was "stupid" to charge us interest.