Author Topic: Family Loan  (Read 607 times)

Wasatch Jack

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Family Loan
« on: October 30, 2019, 09:06:05 AM »
Sorry if this is too simple of a question. For a family loan, how is the interest calculated. The AFR is currently 1.92% for a loan over 9 years. Is that 1.92% per year or is it for the amount of the loan paid when the loan is due. For example, is a 10 year $100,000 loan $1,920 a year for 10 years or $1,920 paid after 10 years. And can all the interest be paid back in a lump payment at the end of the loans term?

RWD

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Re: Family Loan
« Reply #1 on: October 30, 2019, 10:01:25 AM »
Use the table on the IRS website and choose the applicable interest based on the compounding period and length of the loan. The 1.92% figure is for monthly compounding for a long-term loan (over 9 years).

So if that is what you are following you would charge 1.92%/12 in interest each month on the current principal balance ($160 on $100k balance the first month). You should calculate the correct interest once per compounding period. I don't recommend trying to stuff the interest at the end of the loan because it makes the documentation harder to follow to prove you charged the correct amount of interest.

RWD

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Re: Family Loan
« Reply #2 on: October 30, 2019, 10:07:35 AM »
I should note that I am not super familiar with AFR. I assume the amount you charge in interest will be variable based on the current published AFR but I didn't see any direct confirmation of that in my quick searching.

Wasatch Jack

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Re: Family Loan
« Reply #3 on: October 30, 2019, 11:18:56 AM »
The percentage rate stays the same if it is a term loan. If the loan can be called in at anytime than the rate would change from month to month.

RWD

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Re: Family Loan
« Reply #4 on: October 30, 2019, 11:41:33 AM »
Okay, should be pretty straightforward then.