Did you know you are not allowed to lend money even to your own family without charging interest? That sounds crazy, but it's the law of the land in the United States. I can't explain why this is so although I am sure some banking or money-lending industry is behind the scheme. Regardless of how it came to be the law, we have to live in a world where if we want to lend money to our children or parents we have to charge them interest.
But you may be stubborn and decide you will do your relative a favor by not charging interest. What happens then? According to this article you end up paying taxes on interest you never collect. That sounds exactly like the kind of nonsense Congress cooks up on a typical day.
Obviously if you give someone an interest-free loan you are depriving a money-lending business of its opportunity to collect interest. Worse, if some business cannot collect interest on that borrowed money that means the government cannot collect taxes on the interest. So the Congress decided that no one should be able to borrow money for free in this country (except Warren Buffett).
The criminal mind might conceive of all sorts of ways to get around this law, but honest citizens will just do the math and figure out which way costs them less. You may be able to offer a highly competitive interest rate to someone in your family who otherwise would be charged 20 times the same interest by a bank or signature loan company.
Lending money to relatives may not seem like a good financial investment but when you stop to consider what those relatives have to pay in interest to companies that treat them like profiles in a database, you may be able to improve your family's situation while making a slight sacrifice on a few investment opportunities.
If you charge a small amount of interest on loans to relatives you have to claim that interest as income, which means you still pay taxes. But at least you're paying taxes on the interest and not on what you actually loaned.
The real payoff on making low-interest loans to family members is that you help them out of a bind, or help them build up their assets so that they have a financial cushion later in life. There is no reason to support the usurious industries that have caused so much misery in our country if you have the means to help out a hard-working, reliable family member with less-than-stellar credit.
You may lose money on the loan but how much more will your family gain for not falling into the high interest trap? I think that is well worth thinking about.
