How much interest for a family loan?

July 17, 2008 9:32 PM

A family member loaned me money a few years ago. I would like to pay it back with interest. How much interest should I pay it back with?

A few years ago, I had some financial troubles and I was too proud to ask for money. A family member recognized the difficulty I was in and wrote me a large cheque for a few thousand dollars. She told me to take it with no strings attached and just to pay it back whenever I could. She has been gracious about this and has never mentioned it since. It has taken me a few years to get back on my feet and I have been slowly saving up over the years to try and pay this amount back.

However, I would like to pay this back at its "real" value as the loan has been for a few years now and I feel it is only fair to add some interest to it. At the very least, I figure I should add some to it due to inflation and the fact that if the money had otherwise been invested, it could have grown a little bit.

Assuming the loan was for $2500, what would be a reasonable rate / amount to repay?

posted by anonymous to human relations (21 comments total)

It's hard to say what the opportunity cost was. Perhaps she would have paid down her mortgage, invested it, saved it in a low interest account, etc.

What you can know for sure is the value after inflation. So look it up on a consumer price index calculator. Then you can adjust up, if you want.

But I'll bet she'll be so tickled that you actually paid back the loan that the interest won't really be as important. So just pick a justification and go with that amount.
posted by acoutu at 9:43 PM on July 17, 2008

Your question reminded me of this one, and there might be a few nuggets of good data for you in that thread.

I'd also like to put forth the idea that you do something other than "pay interest" to show your gratitude. Interest on loans is a business thing; cold, impersonal, designed for profit. Getting interest on your money is awesome, but some money you don't need or even want to pay financial dividends. Like money you invest in your family.

Perhaps a really great note, a heartfelt conversation and/or a gift or generous gesture of some kind would be more in the spirit of the original investment.

Otherwise, just accept that whatever % you choose is ultimately arbitrary since market factors don't really regulate this sort of transaction.

You're excellent for settling this up and wanting to go one step further. Good work.
posted by chudmonkey at 9:44 PM on July 17, 2008 [1 favorite]

The appropriate thing to do would be to tack on what the person would likely get if they had left the money sitting in a savings account. So, like 3-5% a year for however long. (Other people weigh in on that number, I could be off.)

The nice thing to do would be to tack onto that a dollar amount that is within your budget that brings the figure up to a round number, along with a nice note.
posted by phunniemee at 9:47 PM on July 17, 2008

You might also want to consider making gift in his/her own to Kiva. You can give a gift certificate to Kiva to your benefactor (they start at $25) and he or she can then loan that money (along with others) as a microloan to people who can make good use of it. That way you are paying to forward as well as paying it back.
posted by metahawk at 9:52 PM on July 17, 2008

In addition to repaying the loan, you may consider doing something special for her. Perhaps a day at the spa would be a nice thank you. Good of you to make right with this.
posted by netbros at 9:56 PM on July 17, 2008

5% is proper, given that that's the highest online rate I've been getting over the past few years (including US 90 treasuries at one point).

Plus it's tax-free I assume so the real return is even higher.
posted by yort at 10:13 PM on July 17, 2008

Pay back the original amount -- and buy her something really nice (and memorable, like a piece of art that matches her decor, for instance), accompanied by a huge bouquet of flowers and a sufficiently meaningful card/letter. It will mean far more than any amount of interest.
posted by liquado at 10:17 PM on July 17, 2008

"No strings attached" means no interest. Pay back the amount and take her to a real nice dinner.
posted by rhizome at 10:19 PM on July 17, 2008 [2 favorites]

It will mean far more than any amount of interest.

I actually disagree with this. I'd actually appreciate interest a lot more than flowers, a card, and some art. Sure it's not as thoughtful, but cash is cash.
posted by Justinian at 10:20 PM on July 17, 2008 [1 favorite]

i would go 5% annually, plus a nice-but-not-too-nice gift and a sincere letter of thanks. $2500 compounded annually at 5 percent over N years is $2500 * (1.05)^N.
posted by sergeant sandwich at 10:29 PM on July 17, 2008 [1 favorite]

If this person gave you this money with no strings attached and told you to take your time, they must care about you a great deal. There's no way to know what they would have done with this money otherwise. Maybe it would have been put into one of the many, many investments that have been going down the toilet lately. Maybe part of the money she gave you was earmarked for good work or charity anyway. Maybe she was a gambler and she would have blown it at the track otherwise, but thought to gamble on you instead.

You have already repaid this loan, in a sense, by getting back on your feet. She gave you the money because you needed the help, and the money did help you. When I help other people, knowing that what I did mad a lasting difference is the most meaningful part of the exchange.

So pay her back, and, if it's not too painful or private, talk about what you did to get back on your feet. Explain how much the money really helped, and talk about your plans for the future. Talk about this over a nice meal that you pay for yourself.

Oh, and I partly agree with Justinian: don't buy flowers, a card, or anything like that. If I gave someone a lot of money, and they turned around and wasted it on buying something for me, I'd be disappointed. I gave you that money, either to do something with it, or to spend it on yourself somehow. If I wanted flowers, I would buy them for myself (or, more likely, I would pick them from a field or something).
posted by Deathalicious at 12:04 AM on July 18, 2008

If I had loaned you the money as a relative 3.5% would feel about right. The right answer lies somewhere between 3 to 6%.
posted by caddis at 12:07 AM on July 18, 2008

Yeah, 4-5% sounds right. I strongly disagree with the people suggesting that you repay just the principle, or perhaps turn the interest into a present or a donation. Now that you're able to afford it, you should offer to pay back reasonable interest, and the fact that you're doing it despite not being forced to is a much better indicator of gratitude than a random gift. The person who lent you the money may well turn down the interest, which is fine -- but I think that it's clearly your duty to offer. I'd say you should estimate the interest, round to a convenient number, and repay it with a cheerful 'thanks for helping me out.'
posted by bsdfish at 1:00 AM on July 18, 2008

10-20% depending on the servic—oh, wait, interest. My bad.

The spirit of the thing—no predetermined interest rate and an eye toward returning real value—reminds me of Islamic banking. I have not been able to determine just how much hibah (gift) an Islamic bank usually returns to its depositors for the privilege of using their money, but that might be one standard you could use.

I strongly agree with the sentiment that you should scale it for inflation with a consumer price index. That's just returning the economic value you were given. But beyond that, I reckon your relative's motive was your well-being, because of the relationship. So repay that by being well (got a self-destructive habit you could ditch?), and by building the relationship more actively now that you're in a position to do so. Your personal and family habits will determine whether that means an extra phone call now and again, or taking them to that great lake that only locals know when they visit, or barbecueing them a perfect 135°F steak and hanging out, or what, but whatever it should be, do that.
posted by eritain at 2:01 AM on July 18, 2008

My gut reaction is 5%.
posted by Jacqueline at 2:21 AM on July 18, 2008

When re-paying such as loan, I recommend that you pay interest at some rate that is between the current bank rates for loans and savings. That way it is a win-win for both of you.

A nice gift in addition is also a really nice touch.
posted by dantodd at 4:27 AM on July 18, 2008

If it was me, I'd return the principle along with an amount equal to the inflation rate for the time that you had the money.

If I had loaned someone money "no strings", I would feel funny accepting "interest" from that person. I don't want to "profit" from my friends/family. But if that person told me that he wasn't giving me interest, he was just returning to me the full value of the loan, I wouldn't feel bad. Nobody is taking advantage of anyone.
posted by gjc at 5:52 AM on July 18, 2008

Although the interest idea is a great one, I have a differing opinion on family loans. Pay back the entire amount. Write a letter telling how thankful you are and what a great person they are, and then take them out to a extremely fancy restaurant.
posted by ruwan at 7:46 AM on July 18, 2008

I was in a similar position - I had borrowed $1200, I gave him 8% interest per year, compounded annually, so I think I wrote the check for $2500 or something.
He didn't cash it.
Which was really sweet. Anyway whatever rate you decide on, just make sure you compound it year to year.
posted by chickaboo at 11:06 AM on July 18, 2008

If I gave someone a lot of money, and they turned around and wasted it on buying something for me, I'd be disappointed.

Yes. Don't do anything extravagant, please.

This is like when my sister called my grandmother and told her she didn't have money for groceries. My grandmother gave her money for groceries, plus extra to help her stay financially stable. The next time my sister got paid, she took my grandmother out for a super-nice dinner. My grandmother was pissed, because she wanted her gift to help my sister get on her feet and stay there and going out to eat at an expensive restaurant seemed counterproductive. If my grandmother had wanted to spend that money to take my sister to a meal, she would've done so.

YMMV.
posted by sondrialiac at 1:02 PM on July 18, 2008

$250; that's 10%. People who lend you money aren't looking to make money off of you, typically. If you want to give your benefactor a token, it has to be low enough to not make it look like the benefactor is taking advantage of you, and high enough to be significant.

You should present the repayment during a really nice dinner that you insist on paying for.
posted by jabberjaw at 12:54 PM on July 21, 2008