Have you ever been in that situation where a loved one needs a financial boost, and you’re contemplating lending them some dough? You’re not alone! One of the most common questions we hear is how much interest to charge when lending money, and if so, how much. Let’s unpack this topic and guide you through making a fair decision for everyone involved.
The Big Question: How much interest to charge when lending money?
Firstly, let’s clear the air: you’re not obligated to charge interest when lending money to friends or family. As long as the intention is for the money to be paid back, it is classified as a loan, not a gift. If you do add interest, remember that this could be subject to income tax.
How Your Money Can Benefit Others
Did you know that the total value of all savings accounts in Australia is an estimated $552 billion? Banks use these funds to offer loans and make investments. So, why not be your own bank and lend the money directly? This can be particularly beneficial for those with poor credit scores, who might otherwise face steep interest rates or a bank rejection. As our communities feel the pressure of inflation, high interest rates and unemployment rates, sometimes we need a little helping hand. Your savings can help someone less fortunate get a leg up when they need it most.
A Comparative Look: Interest Rates Across Different Financial Products
Before you decide on an interest rate, comparing the rates across different financial products is helpful. Here’s a quick rundown and you can always keep an eye on the up to date rates from the Reserve Bank of Australia here.
- Current Accounts: Around 0.5%
- Savings Accounts: Up to 2.5%
- Cash ISAs: Up to 1.9%
- Personal Loans: 10.4% – 18%
- Credit Cards: 17% – 27%
- Overdrafts: 34% – 39%
- Guarantor Loans: 29.9% – 49.9%
- High-Cost Loans: 89% to over 2000%
Crafting a Fair Agreement: How to Decide on the Interest Rate
When lending money, both parties must be comfortable with the terms. Here are some things to consider:
- Affordability: What can the borrower realistically repay each month?
- Opportunity Cost: Are you missing out on potential earnings by lending this money?
- Market Rates: Use interest rates from mainstream lenders as a reference point.
There are also more emotional and situational factors to consider when lending money to friends and family. For instance, if you have agreed to a short term loan of a few months, you may choose not to charge interest. Alternatively, if you are lending money to your teen for their first car or first large purchase, you may choose to charge interest as a great learning exercise before they engage in more traditional lending with the banks.
Just remember that whichever way you choose, you should always document the agreement with a written and signed contract so that any misunderstandings are avoided. Our Chipkie platform has an option to generate a contract with all the required terms and conditions to support your loan, and your relationship.
Your Choice: Should You Charge Interest?
This is entirely up to you and depends on various factors like the loan amount, duration, and any sacrifices you’re making. If you’re pulling the money from a high-interest savings account, you could charge a similar rate to avoid losing out.
On the Chipkie platform, lenders can only charge borrowers a maximum of 10% interest on any loan. We believe this creates fair agreements for both the borrowers and lenders.
If done right, lending money to friends and family can be a win-win situation. Just ensure that the terms are fair and transparent for both parties involved. If you’re ever in doubt, don’t hesitate to seek professional financial advice.
So, what do you reckon? Ready to lend a helping hand without breaking the bank? If you found this article helpful, share it or sign up for Chipkie for more reliable financial insights!