Loan between family, is this fair for both parties

sonypc100

Hi

Trying to help a couple of people out and I’ve no idea how to work this out. Everything is cool between the 2 parties and it’s just a check to make sure it’s fair. 

In 2009 Person A lent Person B £35k since then B has been paying A back at £200 per month, at the end of each year it’s been paid back as £2k capital and £400 in interest. 

So in the last 14 years £28k of loan has been repaid and £5600 of interest. As of now the remaining balance has been paid off as a lump sum. 

The £400 stayed the same throughout, it hasn’t decreased as the loan amount shrunk. 

Person A if they had not offered this loan would have put the money in a savings account and left it there, they wouldn’t have been rate chasing or swapping constantly to find better rates etc. 

So the question is has Person A had at least a reasonable return, would they have got more from a savings account or has it worked out fairly fair for both parties. 

If it’s short for person A then B is willing to make an additional interest payment. 

Thanks 

sourcrates

Interest rates vary, they had been low for quite a while, but have risen of late, to be honest, unless you sit down with a calculator and input all the figures, its impossible to say if they have lost or gained anything.

If they were both comfortable with the arrangement, then why rock the boat.

There is also the question of declaring the interest payments for tax purposes to HMRC.

sonypc100

Thanks. 

It’s not rocking the boat it’s that B would be mortified if they had underpaid A and as this month was settle up in full month, it’s just playing on their mind so I said I would try and find out. 

MSE forum was the first place I thought to ask. 

sourcrates

Its really just a case of doing the sums, take the average rate of interest their bank would have offered, against how much the debtor has paid them, from what you have written, I would say £400 a year was a good return, others may disagree.

MalMonroe

Hi, I just think that as the people concerned are related, why try to make things complicated? 

If I'd had any money to lend to a family member at any time, it'd have been interest free for how ever long it took to repay. Maybe that's just my own family, though and the way I was raised - a bit like the mafia, family comes first and all that.

Sadly, I'd probably just have been the lendee, rather than the lender, though.

In this case, I don't think B should feel any guilt or anything. They've repaid the debt with interest and that's what was asked of them. Usually on the forum, people are complaining that they've lent money to relatives or good friends and have been badly let down. 

I think B has behaved impeccably and A has lost nothing. Can't it be left there, between relatives?

Just my own thoughts, opinions and (would-be) experience. 

BrassicWoman

Person B can buy a really nice gift like champagne to say thank you and mark the successful end of the arrangement. Then everything will be fine.

JGB1955

You've been paying the equivalent of just under 2.8% p.a..  If that seems reasonable to both parties, no issue!

theoretica

If person B had borrowed that sum on a 14 year mortgage at 2% they would have paid back very close to the same sum.  Seems within the range of fair to me.

artyboy

The way I'd look at it is that

1) from the point of view of the borrower, you could get personal loans (although possibly not a single one to the tune of 35k) at about 3% for virtually all the period this arrangement has operated. 

2) from the point of view of the lender, without constant mucking around with regular savers and the like, a 3% savings rate on that amount over the period would have been considered decent enough.

So while we don't know about the creditworthiness of the borrower, or the risk/return expectation of the lender, if it all ultimately went off without a hitch, it sounds like everyone should be happy.

serpico100

Looking at historic interest rates, if the lender had put their £35000 into an ns&i direct saver account they would have accrued £6244 gross interest on their investment over the 14 years. Therefore, as it is between friends/family members and £5600 in interest has been paid I would say it was fair to both parties

sonypc100

Thanks everyone