How much interest should I pay

Angela

I borrowed £10,000 off of my mother in law in 2012.
She freely lent me this money on the understanding that I would pay it back over 3 years and I said I will pay you interest on it.
It was never discussed what the interest rate would be or how much interest I would pay her.
She had this money sitting in her bank account having no need to invest this amount elsewhere.
So I have paid her the money back and now need to pay her some interest.
I have a figure in my mind, but want to make sure I am not way out of line.
How much interest would you pay her?
Thank you for your input.

[Deleted User]

Hi,

just my opinion.

She'd be lucky to get 2% this last three years, so compounded, £612, less 20% tax, £122, so £490,

but, it's your mother in law, so you probably wont deduct tax, and I don't think she will be expecting the full amount, will be pleased that you paid back on time.

Sounds as though she's not desperate for the money, and my 2% may be a bit generous, maybe 1.5%, so you could take a quarter off my guesstimate.

I don't want to know your figure, but am I close?

bowlhead99

Based on the fact that an unsecured personal loan would have cost you upwards of 4% a year on the outstanding balance (and maybe 20%+ if you have a bad credit score), then 2% seems a bit low.

She could have put it in a Santander account and earned 3%. She might not seem to care or say anything negative to you, but you probably don't want her looking at a "best buy" bank account table and realising the bank would have paid her more than you were willing to. Just my opinion.

To thank her for her generosity I would probably have paid her something like 5% a year as a nice round number that's easy to calculate with nobody thinking they got ripped off and no need to deal with banks.

Actually I would probably have worked out what the total interest at 5% would have come to (call it £800ish if balance paid equally over 36 months or about £1000 over 48 months) and then just said the interest rate is 0.01% and given her a gift of the £800 or £1000 to say thank you so much for the cheap loan.

She won't pay tax on a gift and maybe she is not too bothered about making money off you as an investment, but would appreciate the gesture.

"Someone I know" borrowed money interest free off family when putting a house deposit together, and later bought them a holiday... Doing favours like that for each other, what a nice friendly family they all are! And tax-efficient!

[Deleted User] wrote:

my 2% may be a bit generous, maybe 1.5%, so you could take a quarter off my guesstimate.

I guess that's why they call you frugal, MacDugal!

bigadaj

@bowlhead, I would guess the tax efficiency is more appealing to the accountant than the friendly gesture, though both are valued.

ChesterDog

I agree with Bowlhead - you should bear in mind what it would have cost you to source that unsecured loan elsewhere because that is what her generosity represents as a saving to you.

Clearly you do not need to match such an interest rate (or there would be no benefit to you in the deal), but to treat her fairly she should also receive some benefit.

I have made a large (somewhat secured) loan to a relative at 5%. In actual fact it's 4.8% which produces a round figure for monthly repayments.

LXdaddy

I doubt there is a "right" answer to this.


I would look at what it would have cost you if you were to have got the loan on a commercial basis and what your MIL would have earned if she didn't make the loan to you. Then pick some number around half way between the two.


You don't want to look like you have taken advantage of her and she won't want to think she is making a profit out of you.

kidmugsy

We've always done our intra-family loans interest-free, but properly documented, and with an absolute promise to repay ASAP. So far it's worked a treat. Mind you, I can think of some loans we would not dream of making.

OP: do defer paying the interest until next tax year, when it will (probably) be tax-free.

Angela

Thank you all for your input, my figure was £450 but I think I will pay her £600 based on your comments, I haven't been a mse' for years for no reason 😉