Do you charge less interest on personal loans?

[free4now]

I've noticed that many people, when loaning to friends or family, charge less interest than market rates, or even less than their own time cost of money. If you have made personal loans and charged less than market rates, what is the most important reason why?

 

[Westernskies]

We don't loan money to friends or relatives. If someone gets in a jam and needs a helping hand, we'll help out financially or otherwise, but not with the bi-lateral stress of trying to service a loan. Too many ways for valuable relationships to go wrong.

 

[Alan]

We don't loan money to friends or relatives. If someone gets in a jam and needs a helping hand, we'll help out financially or otherwise, but not with the bi-lateral stress of trying to service a loan. Too many ways for valuable relationships to go wrong.

ditto.

 

[audreyh1]

Don't loan. It's either a gift, or nothing.

Audrey

 

[Zathras]

Ditto to the above, gift or nothing.

 

[plex]

Ditto, prefer never to loan, just gift. Honestly think this will be the overwhelming answer.

 

[freebird5825]

Ditto to the n-th power, do not loan money. Bad business all around.

 

[Westernskies]

Interest in this thread is compounding.

 

[kyounge1956]

My parents loaned me the money for the down payment on my first house. It was definitely a loan, but so long ago I don't remember if they charged me interest, and if so whether it was market rate or below. If any of my nieces need money for a house, it will be a gift, out of Savings Bonds I bought for the purpose (unless they've already been given the money for college expenses). I was recently asked by a family member to cosign on a college loan. My reply was that I wasn't financially in a position to be able to do so (and I'm not), but I was able to go halvsies with her mom to replace her stolen laptop, as a gift, so that's what I did.

I've never been asked for a significant loan by a friend. I think if I were, my response would probably be the same as many others here—I'd either give them the money or not, but not lend it.

 

[rockyj]

It depends. For cases where someone (family) is in a tight spot and just needs some help, but who is otherwise acting responsibly, it is either a gift or a "pay me whenever you can" deal if that makes everyone feel better. These are with money that can be lost if it goes that way and are mentally accounted for as gifts.

But I do think there is a place for more structured intra-family loans. Offering a mortgage or similar loan to a responsible family member, for less than market rates, but for similar to what might be available in 5 yr CDs, for example, can work out well. As a matter of extended family wealth preservation, it's far better for a smaller amount of interest to stay in the family than for a larger amount to go to a bank or mortgage company. The borrower can save significantly on annual cash outlay and the lender gets a modest income stream.It's simple to set up a basic loan agreement, payment table and auto-transfer of monthly payments. It's a reasonable way help out with larger amounts than one is willing or able to gift. The key is trust, a clear understanding, automating transfers and a borrower with a dependable income.

In-laws helped us with low interest mortgages when we were starting out, saving us a bunch along the way, for which we are thankful. Now we are able to help a retired family member (who is living on a limited but stable income) in a similar way.

 

[audreyh1]

Interest in this thread is compounding.

Badda Bing!

 

[Westernskies]

It depends. For cases where someone (family) is in a tight spot and just needs some help, but who is otherwise acting responsibly, it is either a gift or a "pay me whenever you can" deal if that makes everyone feel better. These are with money that can be lost if it goes that way and are mentally accounted for as gifts.

But I do think there is a place for more structured intra-family loans. Offering a mortgage or similar loan to a responsible family member, for less than market rates, but for similar to what might be available in 5 yr CDs, for example, can work out well. As a matter of extended family wealth preservation, it's far better for a smaller amount of interest to stay in the family than for a larger amount to go to a bank or mortgage company. The borrower can save significantly on annual cash outlay and the lender gets a modest income stream.It's simple to set up a basic loan agreement, payment table and auto-transfer of monthly payments. It's a reasonable way help out with larger amounts than one is willing or able to gift. The key is a clear understanding, automating transfers and a borrower with a dependable income.

In-laws helped us with low interest mortgages when we were starting out, saving us a bunch along the way, for which we are thankful. Now we are able to help a retired family member (who is living on a limited but stable income) in a similar way.

Welcome to the forum! Tell us more about yourself in the Hi I am.. Section....

 

[rockyj]

Welcome to the forum! Tell us more about yourself in the Hi I am.. Section....

Thanks for the welcome, Westernskies. Actually, I've been an intermittent poster for some time under "sparkthewonderdog" (long story). I just changed my ID to simplify things a bit. Hope it's not a breach of protocol. I've added that to my signature for the transition.

 

[seabourne]

I had the other end of the loan - a few years back I had a few thousand in credit card debt (some medical and laid off, but turned out ok all round), and I approached my Dad about a loan. He had a home equity line, so I offered him 1% over his borrowing costs, put together the spreadsheet, we drew up a contract and signed it, and I managed to pay him off about 4 months early. My dad's an attorney, I'm an engineer, your mileage may vary.

 

[W2R]

Thanks for the welcome, Westernskies. Actually, I've been an intermittent poster for some time under "sparkthewonderdog" (long story). I just changed my ID to simplify things a bit. Hope it's not a breach of protocol. I've added that to my signature for the transition.

No problem! Since only one account is permitted per member, we merged your sparkythewonderdog account into this rockyj account. This way you will have the combined post count. Welcome back!

 

[nanannjen]

We are loaning money to my parents as a way to keep them from doing a refi on the reverse mortgage - the fees are just too much. We are charging them 1% over prime (we pay prime on our HELOC), and the loan is to be paid back when they sell the house. They just let us know when they need some cash (for new roof, that type of thing) and we write a check. Keeps the money all in the family! And yes, we have it documented in writing and copies are with us and my brother (who is glad that he doesn't have to deal with it!)

 

[kimber6]

if you do a loan, it better be a "pay me back when you can loan" or you can almost count on some relationship tension, which isn't worth it in my opinion. You could be the hardball-playing family member that demands payments, but in the long run if you end up being the family member nobody likes then the money really won't be fun anyways. Being rich and alone doesn't sound like a good time to me

 

[Khan]

I don't do loans. I do gifts. If you must, pay it forward.

 

[calmloki]

First loaned to my parents when I was 14? Really think it was designed as a learning experience for me. Have since loaned to my brother when a divorce called for some serious bucks. Charged a bit less than I was earning in savings. Didn't get paid back for some years, never mentioned it, out of the blue he paid me back including interest, or some major portion thereof - didn't check. Very glad to have him do the right thing. One likes to have faith in one's brother.