Loans between individuals: calculating payments and interest

A private loan may involve relatives, friends, partners or acquaintances. Trust makes clarity more important, not less: document the amount, rate, payment dates and consequences of late or early payment.

This article covers the arithmetic, not legal or tax advice. Rules vary by jurisdiction; seek professional help for a large amount, collateral, material interest or meaningful risk of dispute.

Terms to document

• Principal and disbursement date.
• Whether interest is charged and at what rate.
• Term, payment frequency and due dates.
• Treatment of late and early payments.
• Evidence required for each payment.
• Parties’ identities and signatures where appropriate.

Equal-payment calculation

For an interest-bearing fixed-payment loan:

payment = P x [r(1 + r)^n] / [(1 + r)^n - 1]

For a zero-interest agreement:

payment = principal / number of payments

Worked example

For $20,000 at 8% a year over 12 months, the estimated payment is $1,739.77, total interest is about $877.22 and total repayment is $20,877.22.

With no interest:

20000 / 12 = 1666.67

An amortization schedule gives both parties the same record of what has been paid and remains outstanding.

Use the loan calculator and enter a 0% rate for an interest-free arrangement.

Legal and tax considerations

A calculation does not replace a properly drafted agreement. Retain transfer records and define interest, default and prepayment in writing. Consult a qualified local adviser about promissory notes, collateral and tax reporting.

Frequently asked questions

Can individuals charge one another interest?

That depends on applicable law and the agreement. Obtain local legal and tax advice before doing so.

Is an amortization schedule worthwhile?

Yes. It reduces ambiguity about the balance, interest and payment history.