Posted on October 31, 2019 at 6:31 AM
Borrowing money from family, or privately borrowing money, has become more popular in recent years. Especially when purchasing a home, more people opt for a family mortgage. Understandable, because banks are always applying stricter conditions. As a result, a bank loan is not always self-evident.
But there is still much uncertainty about family lending.
I recently heard someone say that he can borrow on a private loan without interest. A big misconception.
Higher interest income for lender
Back to the beginning. Because why does around 7.7% * of Dutch families opt for financial support from friends or family? The main reasons are that the lender and borrower determine the conditions themselves, you do not have to go to the bank and that it is cheaper. You determine the interest rate yourself. This is interesting for both the person borrowing money and the person providing the loan. Because the provider so often receives more interest that he receives on a savings account.
Choose a market interest rate
Although there is no minimum or maximum interest rate for private loans, I recommend that you opt for a market rate. Don’t you do this? Then the Tax Authorities see this interest shortage as a gift. This means there is a chance that one of them will have to pay gift tax. That way you are still expensive. Fortunately, you can donate an amount to your children tax-free each year. This way you can possibly return part of the interest as a gift. Read more about this on the website of the Tax Authorities.
What to pay attention to when borrowing money privately
So far, borrowing money from family seems like a win-win situation.
This is often the case, but it is important to make clear agreements. A loan is a financial obligation for several years. A business transaction that can cool the good family relationship. And nobody wants that.