Question: We recently discovered that one member of the family, to everyone’s surprise, owes another a fairly large chunk of money (over $10k) from about five years back. Personally, I have strong feelings about who is to blame for this situation, but I’d like to keep that out of this discussion.
This wasn’t a pre-arranged loan, so an interest rate was never established. (Ordinarily interest wouldn’t be an issue within family, but these two don’t get along very well.) We’re trying to figure out what the fairest interest rate would be.
Some people are saying savings account interest rate, which is awfully low. Others say that the rate should be the same as that given by the fund the “borrower” has been keeping money in. Any ideas?
Answer: I’d expect 6% per year (1/2% / mo on the unpaid balance) – easy to figure & a good balance vs. money market rates, CDs, etc. It’s about what mortgage rate money / car load money has been – the money could have been used to pay down mortgage or perhaps car loan debt. I doubt that many would hold $10k in a savings account. Beats me how you can get a loan, even from a family member, without “arranging” it somehow. It’s no wonder the two parties don’t get along, with $10,000 between them. It seems to me the fairest interest rate would be whatever the going rate was on the day the money was borrowed. Family members usually loan each other money to give each other a break – otherwise the borrower could just go to a bank and take out a loan – so that percentage should perhaps be somewhat reduced.
What the borrower earned on it is irrelevant (suppose the money had been invested poorly, and the investment lost money instead of earning it – should the debt, or the interest on it, be reduced accordingly?).
However, if this has been outstanding for five years, the lender will probably be lucky to get the principal back. If you’re not one of the parties directly involved, you’d be well advised to keep out of it if at all possible – whatever your two cents might be, you’ll end up offending and possibly permanently alienating one or the other.
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