Wrong to charge interest on family member who borrowed large sum of money?

[Dinosaurhearmeroar]

Not my story but someone else’s - two close family members involved. One had lent a large sum of money (five figure sum is all I know) to help them out financially due to a horribly expensive divorce.

there has been a fall out due to lending party asking for interest on loan as the loan will take a long time to pay back and lender is considering their financial situation and future inflation etc.

both parties single so no other people to rely on really financially. Lot of tension now.

being unreasonable - the lender, it’s family.

not being unreasonable - borrower, family member is doing a big favour here and is being very careful with the coffers.

I know my thoughts but love to hear others!

If there was no loan agreement prior to the money being handed over which stated interest would be charged, they can’t charge it. This is only relevant if the money hasn’t been handed over yet really.

Depends entirely on what they had agreed between them prior to the loan

It’s not even about it being ‘family’, if they didn’t agree interest in advance then they can’t charge it now.

It needed to have been agreed in advance but that money in savings at 4.5% would make significant interest, more in a S&S ISA

In addition the lender is taking a big risk. It’s an unsecured loan to someone who presumably doesn’t have the credit to borrow elsewhere?

The borrower wants the benefit of an interest free loan at the lender’s expense?

Lending within family is supportive. Lending without interest is effectively giving away money (the value of the interest)

The lender is clearly only being asked because the divorcee have no other options. That money in a bank account would be earning the lender interest so why should they lose money because they're helping someone out?

I think if I was borrower and the lender did a nice thing to help me out, I wouldn't want them to loose out on any potential interest they could have made during the time it too to pay the money back.

So I think borrower is in the wrong, but if I was lender, I wouldn't want to charge family interest and certainly wouldn't want to fall out over it

How does the interest rate being asked compare with inflation? If it's less than or around about inflation I think it would be poor behaviour by the borrower to refuse.

This. The borrower should at the very least happily cover the lost interest on savings.

They're still getting a good deal compared with commercial rates, which presumably they couldn't access anyway due to affordability or poor credit history, both of which means the lender is taking on a risk that banks wouldn't or wanted to charge high rates for.

What was said at the time of the loan? Not only about interest but also about repayment. If they were lent money on the understanding it would be for 6 months and now they’re saying 5 years I think it’s also reasonable to open up the topic of interest.

The lender is losing out on interest on their savings which could be a fair bit of money.
The borrower is getting an interest free loan.
The purchasing power of the money loaned will have dropped by the time the lender gets it back so actually they will have lost money in real terms, not just lost the interest.
I think it's fair to charge interest but it should have been agreed when the money was loaned in the first place.

If not agreed before then it’s only fair to take some time to discuss this and not just land it on the borrower.

It's sensible to charge interest, even for a family member. Not only to compensate the lender for the interest they're missing out on, but also to make sure the loan is eventually repaid as the borrower won't want to be paying interest forever. Otherwise it's possible for these family loans to get "forgotten about" and never repaid.

Is there a particular reason it was not discussed in advance or why the lender wants to change the terms now?

you can't just decide you want interest after the fact, it should have been sorted before.

Sounds like nothing was agreed in advance and now both parties have different understandings of what they thought would happen. Lending money to family is rarely straightforward and if you are going to do it, get a clear agreement in place beforehand! Is any money yet being repaid, with or without interest?

Depends on the rate of interest amongst others things and when it will be paid back

If it was lent without any discussion about how long for then that was a mistake on the part of the lender. Perso ally I wouldn't charge interest if it was a bridging loan type thing. But if it's a 10 year loan. Yes I would

A family member once lent me a large sum (5 figures to get out of a hole ) redundancy, high outgoings.

Agreement was to pay back in a couple of months. No mention of interest.
I paid back 2 months later with an extra 5% as a thank you for being supportive when I really needed help.

The terms should've been agreed at the start. Suddenly introducing interest when the person is already struggling to pay isn't really going to help is it?

Was the interest discussed when the loan was given? If not, the lender is being very unreasonable.

It would be interesting to learn what was agreed about the term of the loan and whether the borrower is devoting a reasonable proportion of their disposable income to pay it back.

Perhaps it was supposed to be repaid over a few months over which they'd be happy to forgo interest but now it's been strung out over years, in which time the value has been eroded significantly due to inflation and the borrower is now spending freely on non essentials instead of prioritising repayment of the loan?

@Dinosaurhearmeroar It's unreasonable to change the terms of a loan unless the lender has changed the initial agreement by extending the payback time significantly.
So let's say I lend 100k and say I will pay it back in 5 months. The lender can't tell me after 3 months that they want an interest but if I can't pay back in 5 months then I have broken the initial agreement so therefore I have to accept that the lender could ask for an interest on any outstanding loan passed the 5 months agreed upon.

I agree that this should have been clear before the money was lent, however if the repayment time has changed from what was initially agreed and it is going to take longer than originally thought, then interest being added now isnt unreasonable.

Exactly this.

It’s sensible rather than wrong, though as others have said, needs to be agreed at the outset. Also, if interest is charged, the interest payments received are considered taxable income and must be declared to HMRC.

I think the lender is being harsh to charge interest when they know the borrower is going through a hard time.