Exchange rate for repaying debts?

December 21, 2009 4:41 PM

FinanciallyCluelessFilter: If I borrowed money from a friend in British pounds (when I was in the UK) and am now repaying him in Australian dollars, should I be repaying him at the current exchange rate, or the historical exchange rate at the time of the loan?

I'm guessing the latter, but I'm interested to know other people's opinions / if there is a standard practice. I just noticed that the difference between the current exchange rate and that of a few years ago, would make a couple of thousand dollars difference in the total of the debt repayment. (On a related point, should I/he be factoring in the actual fees for currency exchange?)

posted by Weng to Work & Money (19 answers total)

if repaying a loan to a friend, figure it in the way that benefits him the most. he did a good turn by loaning you money. with the exchange rate moving things in the thousands, it means he loaned you a substantial amount. don't quibble the small stuff.
posted by nadawi at 4:45 PM on December 21, 2009 [7 favorites]

A friend?

Choose the rate more favorable to him and use that. No question about it.
posted by rokusan at 4:47 PM on December 21, 2009 [8 favorites]

Presumably you borrowed in UK pounds, like 200quid, then you should pay him back 200 quid :)
posted by lundman at 4:47 PM on December 21, 2009 [3 favorites]

Which is to say: do what Nadawi typed while I wasn't previewing.
posted by rokusan at 4:48 PM on December 21, 2009

You should pay back the amount you owe in pounds, regardless of the exchange rate as the 'cost' of a loan to you is encountered by the lender in pounds [I would expect back the amount in pounds regardless what the current exchange rate is in Aussie dollars]. FWIW, I was in the same situation once and our dollar plummeted here after the loan was made at a higher rate, making repayment much more arduous. Them's the breaks, but at them moment, our dollar is going well against the pound :)
posted by honey-barbara at 4:50 PM on December 21, 2009 [2 favorites]

The key question, to me, is whether you always intended to pay him back in AUD (in which case you should use the exchange rate at the time of the loan), or whether you intended to pay him back in GBP and haven't managed to until the time where you both ended up in Australia. In that case you should use the current exchange rate, I think. If your friend would have incurred foreign exchange fees to get you the money in the first place, it is fair to add that to the amount you owe.

Whenever I've been traveling with friends and debts have been incurred (which is often since we were renting a car and rooms together all over some foreign country), it was specified that they would be paid back in the currency of our country of residence with the exchange rate being the average one in use over the period of the trip. I think we also included a 1 percent currency conversion fee. But this was done for everyone's convenience, and was not a one-way favor like what you're describing.
posted by grouse at 4:52 PM on December 21, 2009

If paying in $AUS, you should pay him whatever he could exchange today for X number of pounds, and that would include his currency fees and be based on the current buy rate for pounds Sterling at his local bank.

IMHO, you shouldn't be sending him $AUS at all, because you didn't borrow $AUS from him. Send a wire transfer or bank draught for the amount in GBP.
posted by ten pounds of inedita at 4:53 PM on December 21, 2009

Basically, I think you are asking which of you wears the FX risk in the transaction. In my view that normally is the obligation of the borrower to make good on the full amount in the original currency. So, if you've moved to Australia and your friend is still in the UK, definitely GBP. If it's your friend that's moved and he wants AUD, then I would suggest you try to work out an equitable FX rate over a period of time as the AUD can be quite volatile. Oanda has good historical tables for cross-rates.
posted by michswiss at 4:55 PM on December 21, 2009

Exactly this issue was a financial disaster for Hungary and other Eastern European countries recently. People took out mortgages in Swiss francs or even Japanese yen because rates were low. Then those currencies rose and they found the loans impossible to pay off.
posted by drdanger at 4:58 PM on December 21, 2009

Best answer: You pay him back what he lent you. He lent you British pounds. So you pay him back British pounds.

The fact that your currency has gone up or down is totally irrelevant to his currency, which is what you borrowed.
posted by glider at 5:13 PM on December 21, 2009 [3 favorites]

The goal is to make him whole, so you pay him back in pounds.
posted by fixedgear at 5:17 PM on December 21, 2009

A US friend loaned me $10k USD which at the time equalled about $14k AUD. He then made it a gift, which was too much. A couple of years later I came into some money and repaid him the $10k USD which, due to the rising AUD only cost me about $11k AUD plus exchange costs. He was happy to have the money back and was not upset that he didn't benefit from the rising AUD. (I also sent a very nice gift).

Pay it back in the currency it was loaned in. Pay all charges associated with transferring AUD into the UK currency. The most important thing is that your friend is not out of pocket by even one pence.
posted by Kerasia at 5:19 PM on December 21, 2009

If you borrowed British pounds, you should be calculating repayment of the loan (plus anything else in the terms of the loan) entirely in British pounds, and you should pay that much in British pounds. Exchange rates are not involved, except to the extent that you personally must convert your money to British pounds in order to pay it in British pounds.

Exchange fees don't enter the repayment equation either. If you borrow like 20 bucks-pounds-whatever from a friend, you wouldn't then charge your friend the fee you pay to withdraw it from the ATM when you repay it.
posted by troybob at 5:23 PM on December 21, 2009

The borrowing friend should absorb any fees or other costs, too.
posted by amtho at 5:52 PM on December 21, 2009 [1 favorite]

What currency does he need to be repaid in? Is he the one who moved to Australia, or you? (Or both?)

It looks like he is still in the UK and you are in Australia.

So, if you borrowed GBP 10,000, you need to give him back GBP 10,000. So if all you have is AUD, you have to give him whatever it takes so he can get that 10,000 pounds.

The exchange rate now is what matters, and it is your responsibility, since you are the one with the different currency. If it was the other way around, and he was in some other country, then you would send him the GBP 10k and it would be his responsibility to make the exchange.

If it was me, I would see what the exchange rates are in either country, and make the exchange where it is cheapest. If it is (made up) 2x for you, and .6x for him, send him AUD 17,000. If it is the other way around, convert it yourself and send him GBP 10,000. Or ask him how he would like to receive it.
posted by gjc at 7:05 PM on December 21, 2009

Pay him back in pounds (as in, at the current exchange rate). The only exception is if you are both using AUD, and the exchange is fairly favorable, in which case it's acceptable to say "X pounds = Y AUD, at this time so let's just call it that".
posted by fermezporte at 8:18 PM on December 21, 2009

YOU take the currency risk, not him. He lent pounds; he gets pounds. Not even close.
posted by JohnnyGunn at 10:02 PM on December 21, 2009

You should really take into account the time value of money and pay him back in pounds, plus what he could've made if he'd invested the principal in treasury bonds.
posted by obiwanwasabi at 2:18 AM on December 22, 2009 [1 favorite]

One problem: What if they were both Australians?

This problem doesn't specify the location of the lender, and to me it matters. If they were two Australian friends in Britain for a while, and the one lent the other thousands of British pounds while there, but got it out of his Australian bank account, he didn't actually lend British pounds but rather Australian dollars. Thus he should be repaid in Australian dollars equal to the original exchange rate.

However if the lender is a Brit who took the thousands out of his British bank account without any exchange, then repay him equal to the original amount in British pounds.

And yes, the borrower should pay for any fees incurred in the initial distribution of money and any fees incurred in the payback.
posted by GregorWill at 2:56 AM on December 22, 2009