Should I charge my children interest when they borrow money?

Question

My children (both male, ages 25, soon to be married, & 32, married) have borrowed money from me and my wife on several occasions. They have yet to pay us back what they borrowed. We have never charged them interest on the money they borrow.

I'm wondering if we should charge our children interest. I feel like I'm hurting them if I charge them interest. I feel like I'm not teaching them about the real world if I don't.

What is your advice? Would you expect your parents to charge you interest if you borrowed from them?

Answer 1

I think there's value in charging family members/friends interest if it will make them take the loan seriously. The problem is that if you're thinking about charging interest because the person seems to be borrowing from you too cavalierly, it may be too late to make them take it seriously.

In the situation you describe, if you're concerned about the loans being paid back, I think you need to have a serious conversation with the kids and make it clear you expect them to pay the loans back on whatever schedule you agreed to. If, based on your knowledge of your kids, you think charging interest would help motivate them to do this, great. If not, charging interest is unlikely to accomplish anything that the conversation itself won't accomplish. If you haven't previously outlined a specific schedule or set of expectations for how you want to be paid back, just doing that (in writing) may be enough to make them realize it's not a joke.

The conventional wisdom is that you shouldn't lend money to anyone unless you're either a) okay with never being paid back; or b) willing to pursue legal remedies to ensure you're paid back. Most people aren't willing to sue their own family members over small loans, which means in most cases it's not a good idea to loan money to family unless you're "okay with" never being repaid (whatever level of "okay with" makes sense for you).

I should note that I don't have kids; my advice here is just how I would handle it if I were considering loaning money to my brother or a close friend or the like. This means I don't really know anything about "teaching the kids about the real world", but I have to say my hunch is that if your kids are 25+ and married, it's too late to radically change their views on how "the real world" works; unless they had a very sheltered early adulthood, they've been living in the real world for too long and will have their own ideas of how it works.

Answer 2

Tell them you will not loan them any more money until their existing debts are paid off. This is closer to how the real world works and it won't come across as vengeful or like your changing your initial "contract".

If they protest, lovingly tell them that your money is not their money, and that an interest free loan from their father is a privilege, not a right.

As far as charging interest on your loans, go for it! Charge them 5% or something small. Just don't do it on the existing loans or that will come across as changing your initial "contract" again, and perhaps once they've proven themselves to be reliable borrowers they can once again earn the privilege to have an interest free loan.

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The book "The Millionaire Next Door" has really good thoughts on this in its section on Economic Outpatient Care.

Answer 3

Parents are eminently capable of gifting to their children. If it's a gift call it a gift.

If it's not a gift, it's either a loan or a landmine for some future interpersonal familial interaction (parent-child or sibling-sibling). I an concerned by some phrasing in the OP that it is partially down this path here.

If it's a loan, it should have the full ceremony of a loan: written terms and a payment plan (which could fairly be a 0% interest, single balloon payment in 10 years or conditional on sale of a house or such; it's still not a gift).

Answer 4

Going from personal experience, my parents let my brother and me borrow money from them all the time. However there was always some noteworthy things to take into account.

1. I was never charged interest, but I was expected to pay it back in full ASAP. Yes, this gets delayed sometimes (e.g. the high interest car payments/mortgage/student loan took priority). However as soon as I had extra money, it immediately went to pay back parents. As a parent I would recommend this.
2. The reason to borrow from your parents and not from someone else is explicitly because it is interest free. Otherwise there would be very little reason to ask family for help.
3. You can always use this as leverage in future events. Child getting married? Here is a $3000 wedding gift to cancel your loan.

As an example, I borrowed a large sum of money on my student loan (we will just say it was $50,000). I had saved nearly $30,000 on my own and my parents lent me $10,000. I paid the remaining off over the course of about a year and a half. After this loan was paid off - I started paying my parents back.

They dictated that I should not worry about paying them until my other interest loans were paid off. Once they were, my priority was to pay back my parents.

Its supposed to help your children get ahead a little bit rather then sucking out interest from them. As long as the money was not needed elsewhere and is spent on something important I would not worry about it. Just make sure they are aware they are expected to pay it back in a reasonable amount of time or with specific requirements (such as after other loans are paid off).

Answer 5

Would you expect your parents to charge you interest if you borrowed from them?

Yes, if they said so when the money was borrowed.

No, if there were no terms communicated when the money was borrowed.

Expectations need to be clearly laid out up-front.

What is your advice?

I think you are asking the wrong question of whether or not you should charge interest.

The real issue is that you are concerned about the 'borrowing', which are really turning out to be 'gifts'. The money amounts are not the issue as much as the lack of responsibility.

Going back to your children and asking for interest will not fix this issue.

This is my advice:

• Consider any money 'borrowed' so far as a gift. Forget about ever getting it back.
• Sit down personally with each child and tell them that they do not owe you any of the money back. This will be good for the relationship and will help with the next step
• Inform each child that they will not be 'borrowing' any more money from mom and dad. Do this with kindness, being clear on why you will not be giving them any more money. Be clear that you still love them and they can come to you for advice.
• When they ask for money in the future, you must reference the previous conversation and give them a consistent "no"
• exceptions are things like if there is harm to a minor child, like they cannot buy food or something. Even in this situation, you can have the child in your house and feed them without writing the parents a check. This does not sound like your situation.

This is a difficult process, and may not go over well with your children. Remember that this is not hurting them. You are actually hurting them more by allowing them to put off developing good habits, independence, and maturity.

It is hard to see someone make choices that hurt themselves and others, but you cannot prevent them from making that choice. If they never feel the results of that choice, they will lack the motivation to change.

Answer 6

This is not really the focus of your question, but it's worth noting that if you live in the United States (which your profile says you do), there are tax implications for you (but not for your children), depending on whether or not you charge your children (enough) interest.

If you charge less interest than the appropriate Applicable Federal Rate (for May 2016, at least 0.67%), you must pay taxes on the interest payments you would have received from the debtor if you had charged the AFR, provided that the loan is for $10,001 or more (p. 7). This is referred to as "imputed" income.

Answer 7

This is largely a cultural issue. I would be appalled at the very idea that my parents would charge me interest for lending me money. Just as they would be appalled if I were to do so if lending them money. I find the idea of attempting to make money off of your children fundamentally wrong.

I realize that you only want to do this to teach them, that you have their best interests in mind and not your own profit. Nevertheless, what will actually happen were you to charge them interest is that you would accrue a monetary gain at the expense of your children. Is that really something you would be comfortable with?

Now, as I stated at the beginning, this is clearly a cultural issue. Based on the other answers here, many cultures, probably including your own, find nothing wrong with this. I've even heard of people charging their adult children rent when they come home for the holidays, something that is completely baffling to me.

The point I am trying to make is that asking other people's opinions on whether you should do this is not very useful unless those people share your own cultural background. My family and culture are such that the idea of charging interest to one's family members seems downright immoral to me. Given that you are asking here, it seems like you might be on the fence about it yourself. However, I freely admit that my answer is colored by my own cultural prejudices and may very well not be applicable to you.

Still, ask yourself, is a relatively small amount of money in the grand scheme of things—or, for that matter, an entire fortune—worth jeopardizing your relationship with your children? Do you really believe that having their parents retroactively charge them interest for a loan will somehow teach them something about the "real world" that your already adult children don't know? One of the main reasons they came to you and didn't go to a bank is precisely that they expected the loan to be interest free.

So, sure, tell them that you won't lend any more until they repay what they owe. Even better, sit them down and have an honest, adult conversation, explaining that the absence of the money they owe is making itself felt in your household and work out a way they can repay you.

What, in my opinion, you most certainly shouldn't do is treat your relationship with your children as a regular business transaction. It isn't and I am sure you don't want it to be.

Answer 8

If they have borrowed money without paying it back, what makes you think you could get interest paid? The problem that you face first is to make clear to them that a loan is a loan. As long as they can get free money off you, they will keep borrowing.

Answer 9

Because this is Money.SE and you're connecting it to offspring, I'd think about a discussion with them to get their agreements.

From my perspective, anything (my wife and) I have will go to offspring in the end. As such, everything borrowed and not repaid simply reduces the estate by that much. Among multiple offspring, such reductions should be against the borrower rather than spreading it out. That should be accounted for in whatever will is created. This would be the discussion point.

It might also be discussed how or even if any interest should accrue for unpaid amounts. If, for example, a 1% APR is agreed upon for unpaid loans, then the final principle+interest amount is taken off of the borrower's inheritance. Existing outstanding loans might (or might not!) be useful examples for sample calculations if desired or needed. (If nothing else, they might serve as reminders that loans were not forgotten.)

By having such a discussion, you can show that you are trying to plan for a fair distribution of your estate, perhaps thereby sidestepping any concern about charging interest to offspring for repaid loans. At the same time, you're handing over some financial responsibility, giving them a power of personal choice, which seems to be a part of what you're concerned about.

Once such a discussion is started, it's possible that any question of interest will resolve itself naturally. The discussion almost necessarily must include all offspring at once. One will find it harder to negotiate from a standpoint of pure self-interest without objection from another.

Think beforehand about what will be said and about what responses might come. Think things through as much as you can.

Answer 10

As per the age of your son you mentions i would suggest Yes, charge them an interest amount but lesser than the market rate. And give them a valid reason behind taking interest on given amount. The reason you might grab from below real incident happen with me at the time of Diwali last year.

I am 26, and i am currently doing job and my salary is not so much that i can accomplish all my dreams of buying expensive Watch and many things. So i borrowed some strong amount from my mom.

She gave me the amount but she asked me to pay interest of 5% and when i asked the reason behind demanding the interest she said something which was valuable things.

She said me "If i would not give you money then you will definitely ask money from some money lenders or your friends because now that watch is your first priority. And in that case you need to pay the higher interest rate to them. And in life there might be situation where we would not capable to help you in terms of financial. So this is the time you should learn to pay interest and responsibility of borrowing amount and repaying it on time with interest rate. This will help you also to learn a lesson and our money will be withing home

I am not expert in parenting because i am still unmarried but i shared my point of view for your question.

Thanks

Answer 11

In terms of preserving good relationships one approach is to charge a nominal rate of interest. maybe a few percent of the total and agree a time when it should be paid back. This may actually make them feel better about borrowing them money, especially, especially if it is something like business loan or buying a house or car.

If they need the money for a real crisis and they have no clear strategy for paying it back then it may just be better all around if you make it clear that it is a gift.

What you don't want to do is set up a situation where you are creating unnecessary problems down the road and that will very much depend on your individual relationship and how seriously you take the loan.

Here it is important that you are completely open and honest about the arrangement so take the time to make sure that both parties understand exactly what they expect from each other.