<p>Our as has a full time job and a part time business. He’s doing extremely well with both. We were casually talking with him about how poor the current interest rates are and he mentioned it would be nice if he had more capital for more inventory, which he has historically always sold out at 25 or more % profit. </p>
<p>H and I suggested we make a one year intrafamily loan with no prepayment penalty, charging him monthly interest of 0.4%, which is the highest rate we could get at any of our current banking institutions or brokers. (It is also above the minimum 0.33% rate set out by the IRS for these types of loans.). It would have him making monthly interest only payments and a balloon payment in 12 months. </p>
<p>I drafted two different (but similar) promissory notes for S to review, so we can discuss. They were on the internet and said to be suitable for our state, HI. </p>
<p>We are POSITIVE he will promptly repay, likely before the 12 months are up, as he is extremely good with money and has a great head for business. Even if for any reason he is unable to repay, it will not have any serious impact on our financial security or situation. </p>
<p>Anyone with any thoughts? We’ve never done this before–never loaned or borrowed with family at all, only used commercial, but would love to help S grow his thriving business. S has absolutely no debt and has always been totally fiscally responsible. Our funds have been languishing in a checking account earning 0.01% interest. </p>
<p>Himom – make the loan if you and your husband would be comfortable giving the money to your son. You ae right to draft the promissory note and treat it like a real, business loan… but in your own minds, you and your husband have to think of this as a gift-- and count yourself lucky if and when you get paid back.</p>
<p>Here’s why: stuff happens. Your son could get sick, he could get laid off of his paying job, or he could find himself unable to keep up with payments for all sorts of reasons. If he runs into financial problems, your loan will be the first thing he’ll let lapse-- it’s the only rational choice, because he can’t very well stop paying rent, and the intra-family loan is the one thing that won’t negatively impact his credit.</p>
<p>If he falls behind in loan payments, he’s likely to start avoiding you. I have a habit of deliberately lending money to some family members who I prefer not to deal with, knowing that lending them money is the surest way to get them to stop calling to complain about all that’s gone wrong in their life. So the only way it will work if there is a tacit understanding from the outset that he should pay back the loan, but neither you nor your husband will ever bring it up or say a word if he doesn’t. </p>
<p>Do keep one thing in mind: he is setting up a business and wants capital. He can borrow from you at low interest – and pay you back – but doing that won’t build credit. If he can borrow the same amount of money from a bank and pay it back in a year – the he (and his fledgling business) will be establishing a positive credit record that will improve his ability to borrow and the interest rates he might be offered in the future. </p>
<p>We did this with our son under similar circumstances except it was a rather large loan payable over a few years. He has always paid on time and more than his payment. It helped him build a thriving business that employs others. I am very glad we did it and have no regrets.</p>
<p>But I do agree with Calmom: do it only if you can afford to lose it and let him know that it won’t hurt the relationship if it doesn’t work out. I value my son much more than I valued the money and had things not worked out, it would have been okay.</p>
<p>I think you should treat it as risky unsecured business investment, and share in the profits 50:50 that derive from it. Of course what you do with any profit is up to you …</p>
<p>If you have a high upside there is less basis to complain if things go bad and you lose it all.</p>
<p>Business deals among family have a way of ruining family relationships. I would never lend money to a friend or family member.</p>
<p>If the amount is under the federal tax limit for gifts - I would gift him the money instead. If the business does well he can gift it back to you with interest (or not) at that time. </p>
<p>Well, I am going to take the less popular position. Seems to me that HImom is sufficiently financially secure to be able to deal with any downside on this particular investment. She is frustrated with the low interest rate available from banks, and her son is frustrated not to be able to grow his business as quickly as he could had he more inventory. While I generally agree with Shakespeare (“Neither a borrower nor a lender be.”) in this case I would make the leap of faith. Seems to me it is likely to be a win-win for each party.</p>
<p>H and I, when our son graduated from college two years ago, bought a new car for him that he would use to get to his first job. The title is in our names and will be transferred to him when he has finished paying us back. He chose the vehicle and is the only one who drives it (stick shift which we don’t do). Son made up a Google doc spreadsheet that has him paying off the full amount in four years. He pays us $500/month regularly. I admit that we are charging him no interest – consider this deal part of the price of getting him launched.</p>
<p>I never have to remind him of the monthly payment – he comes to me with it on his own, and we update the spreadsheet.</p>
<p>S has had a credit card for years that he always pays off in full each month. He also pays his (modest) student loans at an accelerated rate (should be done with them in two more years) and his credit score is already excellent. </p>
<p>We fully expect full repayment, but will manage if something (serious illness, job loss) prevents it. We consider the odds of a problem very low. Son has already accumulated a decent nest egg for crises.</p>
<p>So I am in favor of making an exception to the general rule in this case.</p>
<p>My parents lent us a substantial amount for the down payment on our first house at an interest rate at the bottom end of what was then the going rate: 12% ! H and my father established a payment schedule just like a regular mortgage, which we actually paid off ahead of time. </p>
<p>H and I lent S the money to cover his grad school expenses that were not covered by a scholarship he won and some money he had in trust, thanks to his godfather. A HELOC that he could draw on had an interest rate of 2.25, in contrast to the usurious rates charged graduate students, and it is tax deductible for us. He has been extremely frugal, and drawn significantly less than I thought he would. Just a couple weeks ago, H told me that S called and asked what his payments would be, as of now. I feel comfortable knowing that he will be responsible about making payments.</p>
<p>I understand why some people are gun-shy when it comes to intrafamily loans, but I think that there are several key factors: Know the character and track record of the person you are dealing with, establish a repayment schedule upfront, don’t lend an amount that would cripple you financially if something drastic happened.</p>
<p>The IRS has a federally adjusted AFR (applicable federal rate) tables which show the rates for short term (1-3 year), medium term 4-9 year) and long term 10+ year) loans each month, Revenue Ruling 2014-13 Table 2. The may 2014 annual APR under the table is short term .33%, medium term 1.41% and long term 3.27%. I chose .4% interest! as it’s the best rate we can get in a money market or other investment where the funds will be held for a year or less at this time. </p>
<p>Thanks for these perspectives. They are helpful to consider. We would be fine with gifting him the amount of the loan if needed, but he really wants to make it on his own. He and we are curious to see how this will work and are making it short term, just to see how it goes. We predict he will repay it all by December or January at the latest, as that’s when this batch of inventory is slated to be totally sold out. </p>
<p>The loan is interest only with a balloon at the end of 12 months (or sooner if he chooses to pay it sooner). It’s similar to how H and I got a no interest intro CC to buy 1/2 of our van and paid it all off the week before we would have had to start paying any interest on the CC. If S never repays the loan, it will just be less we will gift him or leave to him in the future. Yes, I do recognize it IS a risk on paper, and there is a possibility it could never be repaid, but personally I’d say it’s maybe under 1%, knowing our kid. He has more than the amount we are lending of his own invested in his inventory, as well as more than that in retirement savings, so very financially stable. He’s been running his business for over 3 years and it has been growing exponentially. It will continue to run, even if he gets sick. </p>
<p>S already has an excellent credit history in the high 700s and CCs that have high credit limits in the 5 digits. He has never been late or defaulted on anything, ever. </p>
<p>If your son should default, what would you do? Would you take him to court or put a lien on his assets? If none of the above then what would you need the agreement for?</p>
<p>My siblings and I have loaned each other money over the years. We’ve never charged each other interests or drawn up an agreement. We’ve always paid each other back too.</p>
<p>I wouldn’t loan anyone money if you can’t afford to lose it.</p>
<p>The only reason we are using a promissory note and the AFR interest is just to try out the process and see what we all think of it in case we decide it’s something we may want to repeat. </p>
<p>Agree that we would never lend money we couldn’t afford to lose and would counsel anyone against doing so. Have never loaned anyone money before, so this is new territory for us. S has never borrowed, so it’s new territory for him too. Technically the IRS imputes interest if none is stated, which is why we are stating an interest rate above the APR of 0.4%. </p>
<p>Both my parents and my in laws loaned us money when our business hit a rough patch. We never signed anything and we paid back installments in full plus interest. Trust me it’s tough taking loans from family because though they never said anything I felt like I shouldn’t spend a penny on anything while I owed them money. One of proudest days was those last payments.</p>
<p>I agree with others - when I loan money I mentally assume it is a gift and won’t be repaid - it’s how I make the decision - will I be resentful if it’s never repaid? Will the relationship be able to overcome that possibility. But obviously he’s not someone sitting on the couch coming up with some get rich quick scheme. </p>
<p>Actually, his business has grown exponentially and he sells all the inventory he can acquire. He has been so successful that his part time job already earns more than his full time job and he loves both jobs. We are very proud of him and feel this is a way to contribute to his business growth without interfering. </p>
<p>Mentally, we would be fine gifting him this amount, in the extremely unlikely event he doesn’t promptly repay. </p>
<p>The point isn’t the risk involved – it’s family dynamics and what happens when things do go bad. Unfortunately, as a lawyer I sometimes had to deal with this situation, and it was very sad. The parents would find themselves cut off from children and grandchildren because of the unpaid debt. I think when a parent says that she is very sure that the son will make all the payments on a regular basis --the parent might be right, but that parent is especially vulnerable to feelings of hurt and disappointment if the son does fail to live up to obligations. So it really wouldn’t matter whether there was a 10% risk or a 1% risk that the son will muck it up: the point is that there is a relationship that transcends and is more important than the business relationship. If there is any potential for the money to become a bone of contention within the family… that may be a lot more costly than the money itself.</p>
<p>So a lot comes down to family dynamics and attitudes about money. Some families are very loose and forgiving about those sorts of things… others keep a mental accounting of every dime, whether it is designated as a “gift” or a “loan”. </p>
<p>I think it’s a great idea, especially with interest rates so low you can’t make any money on cash balances these days.</p>
<p>You will include the interest income on your tax return and your son will presumably have a business interest expense. Make sure the accounting works. </p>
<p>We loaned our son 100% of the purchase price of his condo. We have a mortgage on the property and it was recorded, which is a requirement for our son to deduct the interest he pays us. It is an interest-only 9 year loan, and benefits us as much as him. I am earning interest on balances that were previously earning nothing. He did not have the credit to get a low interest loan, and of course he wasn’t going to get a 100% loan. I am the lender. He owns the condo. If he loses his job and can’t afford the mortgage he might have to rent the place out. Rents are high and would cover interest + taxes + hoa. </p>
<p>My husband and his still-business-partner (35 years later) started their first company with loans from both sets of parents. We’ve loaned our son money for his business; he’s loaned us money (short-term loan); we’ve loaned our daughter money for her business. Isn’t that what family is for?</p>
<p>We borrowed money from our in-laws for a down payment with the understanding we would pay it back (0% interest) over four years. You’d better believe that was the FIRST payment I made every month! We were able to pay it back early.</p>
<p>My parents have big hearts and have “lent” money to other relatives and never seen a dime back. I would probably not lend money to anyone other than kids or parents.</p>
<p>Yea, my friends regularly “lend” to his spendthrift, down on their luck relatives, but have never seen a dime returned. They don’t ever expect to but are regularly guilted by HIS mom to keep enabling his relatives. It’s sad and causes some stress in their marriage. </p>
<p>Thanks for all the interesting and diverse perspectives. It is one of the nancy reasons I keep visiting and posting on this message board, tho my kids are no longer students and aren’t sure if they ever plan to get future masters or other degrees. </p>