Question: I’m borrowing money from my sister-in-law to increase my capital. What’s a fair interest rate when I repay my loan, which at the same time will not be too steep for me? I know I can use our relationship to “bargain” for a good rate, but of course I also don’t want to put a strain on our relationship in doing so.
Answer: Try to put yourself in the shoes of your sister-in-law. Supposing you are her and you have the money, you would put it in a bank account that yields interest, right?
Let’s say the prevailing interest rate among banks is about 7 percent gross annually.
You put your money in the bank because you know it is safe there and with the bank’s size and reputation in the industry, you would think that it is not likely to go and fold up. Plus, the fact that it is partially guaranteed by the government–up to P500,000.–gives you some guarantees.
But here comes your sister-in-law (who is actually you, in this instance) who wants to borrow money from you for her business. I’m sure you’ll think twice in giving her your money.
How sure are you that your sister-in-law’s business will succeed? Is the business booming? Or, if not, by your estimate, does it have a chance to succeed?
If the business fails, will your sister-in-law be able to repay you? How soon would that be? These are just some of the things that you need to consider.
If you think her borrowing money from you is risky (but at the same time you want to help your sister-in-law), you may consider adding a premium of 5 to 10 percent on top of the prevailing interest rate of 7 percent. So, that would be a rate of 12 to 17 percent per annum.
If you think the business is growing and there is a good chance you will be repaid, you can put a premium of 3 percent as a good estimate, adding up to a total of 10 percent.
Always remember, The higher the risk, the bigger the premium.