Hi,
I am asking a personal loan from a family member. He verbally agrees the loan amount of $25,000 will not charge with an interest rate, but he wants me to sign a loan agreement which includes an interest rate. He says a loan agreement has to have an interest rate to be effective, and he WILL NOT ask for interests when I pay him back.
Here are my questions:
- Is he telling the truth that a personal loan agreement has to have an interest rate to be effective in California?
- If he is telling the truth, what's the minimum interest rate for that principal? Can it be very small, like 0.0001%?
Thank you very much!
Robin MashalLitigation LawyerLos Angeles, CACA licensed ·
Disclaimer: The materials provided below are informational and should not be relied upon as legal advice.
Although there are no specific requirements under California law to charge interest on a loan, not charging any interest may make the transaction resemble a gift. From a tax perspective, this is exactly the position IRS has taken on interest-free or below-market-interest loans among family members. Take a look at Section 7872 of the Internal Revenue Code (see link below). Once the IRS invokes this, your family member/lender will be imputed a tax income she/he never received, and be taxed on that "income." The minimum interest rate for such transactions are set by the applicable federal rates (AFR) which are published by the IRS from time to time. Be sure to consult your own attorney to protect your legal rights.
There is no such requirement for a loan to have an interest rate. If he believes that this is true, then ask him show you the requirement in the law. Furthermore, if you sign an agreement which has a stated interest rate and he orally states that he will not hold you to that agreement, if there is ever any dispute about this agreement, the oral statement likely will not allowed into evidence to dispute the written agreement under a doctrine called the parol evidence rule. Thus, I would highly advise against you signing an agreement with an interest rate unless it is one with the extraordinarily small interest rate as you suggested.
I'd like the same loan terms, no interest. Anyway, you have no problem here, just get an additional document that you both sign that says what he said, ie, he will NOT charge you interest. Make sure that the initial doc says something to the effect that any changes in the terms are to be in writing and signed by both parties. Good luck with it.
No it is not true that a note must be for interest-- but to be binding a contract must have consideration--otherwise it is a gift. If it were me, I'd give him some sort of security. If you say you will pay interest you will be bound to do so.
There is a presumption in law that money loaned is meant to accrue interest. If there is NO writing it will be presumed that interest was to be paid. There is no "minimum amount."
Please note that loans between family members often go "bad"-- and cause much family chaos.
