Lending family money - too problematic?

[user1467718508]

My parents are retired, and comfortable, rather than wealthy.

They cashed out their pensions in full, meaning they're relatively cash-rich at present, but it's a finite amount that has to last them the rest of their days.

I'm very protective of them, as my mother in particular is too keen to please, and says yes without thinking then regrets it later.

Long story short, one of the grandchildren (who never visits, sends cards, or shows any interest otherwise) has asked for a 'loan' so she can buy a house. The loan is over 5k, less than 10.

Parents said yes, then felt they were being taken advantage of and regretted it.

Granddaughter asked for a signed letter saying it was a gift, otherwise the loan company wouldn't accept it.

My mum felt awkward about this and said no, GD then emotionally manipulated her by saying how devastated she was 'crying at her desk' etc.

They've now sent the signed letter (feeling under pressure) and are meeting up to discuss the finer points of repayment.

The loan term being discussed is a year, which seems optimistic from my PoV and I can see this dragging on for a long time.

It's their choice and I won't meddle, but (in private discussion) my DP and I are in disagreement over whether in this scenario, my parents should charge a small interest rate to cover what they'd lose from it being sat in their ISA.

I'm of the view that it's a big favour, and my parents shouldn't be losing out on interest in addition. My DP thinks lending family money should be just that, and shouldn't be subject to interest...

Thoughts would be greatly welcomed! My DP made me feel like a heartless miser

The golden rule is, don’t lend it unless you can afford to lose it, should the borrower not pay it back.

In your DMs situation I’d advise her not to lend it to her but only to give it to her IF she can genuinely afford to AND is 100% happy to do so.
Otherwise my crystal ball tells me there is a very good chance she won’t be paid back and family relations will be broken down.
Is that what she wants?

Sorry that should say IF she can genuinely afford to NOT to get it back

PS I don’t really think the interest rate is important. It’s miniscule these days.

Unless your parents are lacking in mental capacity I'd pretty much stay out of it. You actually say yourself "It's their choice and I won't meddle" but thinking about getting involved and advising them to do things like charging interest is meddling. They may make decisions with their money you disagree with, they may even make wrong decisions but it is their money and they are not children.

@TooTrueToBeGood to be clear, I'd never talk to my parents about this or suggest that they include interest - I'm only wanting to hear outside opinions purely for myself, given that my DP and I disagreed on it whilst talking hypothetically and in private. It made me wonder if my viewpoint was a bit heartless.

@19lottie82 Thanks ISWYM, if it were a larger amount and over a longer loan term, then it would be a different story, I suppose. For the sake of a couple of hundred quid, it would be a bit pedantic.

If she’s borrowing say £7000 over a year the interest your parents would lose would be no more than £100 If they’re getting 1.4% interest.

Lending it in the first place. It all depends how much of your parents savings it represents. If it’s a small % then that’s fine.

In in end it’s their money and you can’t interfere. It’s up to your parents to decide if they are willing to write off the money If she doesn’t pay it back.

Agree it is heir money but be careful. My FIL has had his pot continually raided by my BIL who has never stood on his own two feet, he is mid 50s and still being bailed out by Daddy. He guilt trips him 'we will be homeless', 'I'll pay you back when I sell my house' etc etc. FIL is now down to his last couple of K and needs to stay stop, but where do you stop when you have been doing it your whole life?

Your parents perhaps not so foolish, but it is a slippery slope. There is nothing as rewarding as standing on your own two feet and realising the world owes you nothing .....

No. I don't lend money to friends or family personally. In your parents situation, I would say its either a gift or nothing. Loans are messy.

Has the money been handed over yet?
I’d want to get an agreement drawn up laying out the loan agreement and repayment plan. Also put in it that the other letter was for the loan company only because what’s to stop the gd just saying it was a gift, I’ve got the letter to prove it.
If your parents aren’t comfortable with this why are they even lending it?

The interest wouldn’t be much, however has the GC shown how they can afford to repay it if they are buying a new house? If the GC has a letter stating it is a gift how will repayment be enforced?

They might want to take legal advice - sending a letter they know is untrue to get a mortgage sounds like mortgage fraud to me. While the grandchild would also be responsible, they may be deemed to be guilty as well. A solicitor or the CAB should be able to let them know.

I'd be worried about this. A repayment of £600 a month from someone struggling for £7,000 and is buying a house? Doesn't sound very likely to me.

I'd also be concerned that its 'one of the grandchildren'. Does that indicate that others will expect the same?