Private loan interest rate

steve866

Hello,

One friend made a private loan to another a couple of months back. They agreed for it to be interested free if it was paid back by 31st January. They signed a very basic agreement which they drafted with help of ChatGTP. The agreement included:

Any outstanding balance to the loan remaining after 31st January 2025, will accrue interest at the prevailing standard bank rate until the balance is fully repaid.

They now what to think what the interest rate would actually be should they decide not to settle it in full. In some ways the wording probably wasn't very helpful as it is a bit grey, but it is better than nothing.

The simplest/clearest option appears to be the BOE base rate, however I would think any lending typically takes place 2% minimum above base rate? Any advice appreciated, I have been asked to give an opinion as someone impartial! 

Mark_d

In agreements I've seen, it's normally specified to use 1% above the NatWest SVR.  Things like that.
In your case I think the HSBC standard variable rate would be a reasonable interpretation of the applicable interest rate.

steve866

Thanks look like 6.99% and seems fair for everyone. 

Hoenir

steve866 said:

Thanks look like 6.99% and seems fair for everyone. 

Not a question of fairness. The detail needs to be agreed before the contract is signed. 

Grumpy_chap

steve866 said:

Hello,

One friend made a private loan to another a couple of months back. They agreed for it to be interested free if it was paid back by 31st January. They signed a very basic agreement which they drafted with help of ChatGTP. The agreement included:

Any outstanding balance to the loan remaining after 31st January 2025, will accrue interest at the prevailing standard bank rate until the balance is fully repaid.

They now what to think what the interest rate would actually be should they decide not to settle it in full. In some ways the wording probably wasn't very helpful as it is a bit grey, but it is better than nothing.

The simplest/clearest option appears to be the BOE base rate, however I would think any lending typically takes place 2% minimum above base rate? Any advice appreciated, I have been asked to give an opinion as someone impartial! 

The friend might benefit from reading this:
https://www.moneysavingexpert.com/loans/lending-money-to-friends-family/

It would be far simpler if this is settled this week, or very soon after, so that it can all just remain as interest-free.

IMO, references to BoE rate are overly complicated.  A more appropriate rate would be whatever savings account the money was in before it was lent to the other couple.  So, if the money was in the AnyBank Super Instant Access Savings Account at 0.5% interest, then that is the rate.  If the money was in the Land Building Society Long Term Tied Up for Ages Deposit Account at 2.5% interest, then that is the rate.  It's probably worth trying to find a way to keep it all simple, especially with regard to calculating the actual interest due against varying balances and potential variations in the interest rate.

silvercar

I would have thought the prevailing standard bank rate would be the Bank base rate. The fact that typical lending may take place at a higher rate is irrelevant, what was in the contract was the prevailing standard bank rate. 

Any interest paid would be liable to be taxed by the receiver.

steve866

Thanks all. Either way the interest is likely to amount to a round of drinks down the pub given the amount and the time it could extend for if they decide to do so.