Interest-ing?


 tammymom

When Tammy got married, she and her husband Ben borrowed money from her parents to buy a car.  After paying them back a little bit every month for two years, they finally paid off the loan in full – or so they thought!  After mailing her parents what Tammy thought was the last installment, she got an awkward (to say the least) phone call from her mom…

Her mom told her that they had tallied up the payments, and even though they had paid back the base amount that was loaned to them – she was surprised that they hadn’t added on any interest!

Tammy was floored – she and her parents had never discussed adding interest to the payments – and she couldn’t believe her mother was asking for it! Her mother, however, had just the opposite reaction. She couldn’t believe that Tammy and Ben hadn’t assumed at least some interest would be included!  After all, if her parents had left the money in their investment account they would have earned about 5% on it.  Her mother reasoned that they were happy to lend them the money, but they didn’t intend to lose money on the transaction!

While some of her friends are taken aback that Tammy’s parents would ask for interest, others think it is completely reasonable – and wrong of Tammy to assume her parents would be willing to lose money on the loan.  So — what do you think about Tammy’s situation?

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11 Responses to “Interest-ing?”

  1. Simone says:

    When you lend money to a relative, it’s really bad karma to charge interest. Many people, myself included, think it’s just wrong. Families should help one another.
    But okay, if you don’t agree with me, then one thing we can all agree on…..
    When you take out a loan in any business transaction, it should be stated upfront what the interest is. Tammy’s mom is TOTALLY in the wrong here. She should have told Tammy that she expects interest, and what rate. Then Tammy could have made an intelligent business decision.

    Just last week my brother bought a brand new car with 0% interest for 3 years. Had Tammy’s mother been considerate enough to let Tammy know that she expected 5% interest on the loan, Tammy could have shopped around and found a car with an interest rate of less than 3%, and perhaps even 0%.

    The mother is at fault and Tammy should calmly tell her mother that since she didn’t ask for interest when the money we lent to her, she shouldn’t be asking for it now that the loan is paid off.

  2. lak says:

    mom’s totally wrong — both about expecting interest and about not saying so up front — but Tammy should have made sure she knew all the ‘terms’ of the loan before she borrowed.

  3. Sue K says:

    I agree that mom is in the wrong with asking for interest now. It definitely should have been discussed at the time that her parents agreed to lend them the money. Hopefully this will be settled amicably by all.

  4. Lisa says:

    While I agree that they should have agreed to ALL terms before, I think interest should absolutely be expected – and offered – when repaying a loan – why should the person doing you a favor have to lose money??

  5. Simone says:

    Lisa,
    Glad you agree that the mother should have told Tammy that interest was expected before the loan was given.

    However, I’m kind of astounded that you would view a person helping their own child with a loan should view it as losing money. It’s like Tammy’s parents inviting her to dinner and cooking a special meal and handing her a bill afterwards for the groceries – after all, the parents are losing money by feeding her, right?

    This is their child. They brought her into the world, and now they want to charge her interest on a loan that she paid back in full? Brrr…..they’re icy! Glad my family isn’t like that!

  6. Susan Johnston says:

    I think it’s reasonable to want a small amount of interest but mom should have set this expectation upfront instead of expecting her daughter to be a mind-reader.

  7. Julie says:

    Simone,
    While she is their daughter, she is not a child. The job of parents is to raise their child into a self-sufficient, contributing adult member of society. She is now that adult, and married to boot.
    Your dinner analogy is spurious. A car loan, likely to be many hundreds or thousands of dollars, is nothing like a dinner. A better analogy would have been a down payment on a house.
    Speaking of which, should the parents expect to fork over their savings or retirement funds interest-free to their grown, working, married ‘child’ for that too?
    If they demur, are they cold? Or just done with parenting a child?

    At what age should Tammy stop expecting free help from her parents, if ever?
    Can she and her husband just approach them for interest-free loans for whatever life expense they’re facing at the time?

    What about when she’s fifty and they’re seventy or eighty? Still with the interest-free loans for the ‘child’ who now has a thirty-year career, a family and presumably a retirement account of her own?

    • Simone says:

      Julie,

      A car loan is “hundreds of thousands of dollars”? That’s some car!

      That aside, the main point of my post was that if someone is going to lend money to someone else, you don’t discuss interest AFTER the loan has been paid off. You discuss it BEFORE the money is lent.

  8. Rebecca says:

    I’ve been on the other side of this and been the one borrowing the money. I completely expected to pay interest to my parents. I’m married and an adult (although one in their 20s), and if I can’t afford something on my own right now, I don’t think it’s my parents responsibility to help me out free of charge. My parents gave me the loan at a lower interest rate than a bank would. It was all discussed up front and agreed upon.

    While I think it’s great if a parent wants to help out a child without charging anything extra, there’s also nothing wrong with asking for someone to at least match the interest that they could have earned by keeping that money in savings. If you read almost any money magazine or website, you’ll see that they recommend NOT loaning money to family without some set expectations or you can end up with someone borrowing from you forever without paying it back.

    I was the one that brought up paying interest to my parents. I need to learn to stand on my own two feet and survive on my own and if I continually ask my parents for money with no strings attached, what responsibility does that teach me and my husband?

  9. jake says:

    If you’re lending money I would think that payback time would be the 1st discussion, the second would be interest. If there’s neither it’s a gift!

    Per the IRS if you don’t have a contract to get the money back in a finite (and reasonable, e.g. < 40 years for house or < 5 years for a car) it's a gift. If you don't charge interest then the amount that the market (e.g. a bank) would charge in interest is a gift.

    When I bought my first house I didn't have enough of a down payment and I borrowed it from my parents with a simple one page contract and there was interest. (Incidentally because it was for the purchase of a house I could deduct it!)

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