Where can I find a private loan

Interest-free loan: what to look out for

With interest-free loans, private individuals who are close to each other want to help each other quickly financially. As a rule, creditworthiness or interest income do not play a role among relatives or friends. Nevertheless, lenders are well advised to conclude a written loan agreement and arrange formal aspects of lending. In this way, possible tax traps can also be avoided, because interest-free loan may cause gift taxes. FINANZCHECK.de shows you what you have to pay particular attention to with this loan.

The essentials in brief:

  • The interest-free loan is usually granted to friends or relatives without consideration (interest).

  • In addition to family members, business partners or employers are also among the lenders.

  • In the case of interest-free loans with a term of more than one year, the tax exemptions should be kept in mind if a gift tax is due.

  • A written loan agreement is recommended for larger amounts.

What is an Interest Free Loan?

In the case of an interest-free loan, the lender generally waives payment or consideration for the money borrowed. Interest-free loans are usually granted in the private sector and often within families. In addition to private individuals, companies can also be lenders.

An interest-free loan is intended to consciously use the advantages of a private loan agreement compared to the usual bank loans: The lenders want to do good and forego the mostly strict criteria of standard market lending. The interest-free loan is granted regardless of creditworthiness. We deliberately refrain from checking Schufa ratings or other creditworthiness criteria. Most of the time, the lender and the borrower know each other so well that the aspect of immediate and quick help is paramount. Nevertheless, private lenders often grant the interest-free loan on the basis of a written contract for legal or tax reasons for larger amounts of money.

Interest-free loan: who to whom?

In many cases, an interest-free loan is taken out between family members. In addition to relatives, the following groups of people often grant interest-free loans:

  • friends and acquaintances

  • employer

  • Business partners with each other or with start-ups

What to watch out for: Interest-free loan within the family

An interest-free loan among family members is designed to do good. Often parents want to help their adult children and the newly founded family to build or buy a house for a long time. If the lending bank pushes for further equity, the interest-free loan from the parents can solve the problem with mortgage lending. But well-intentioned does not always mean well done: Sometimes the relatives here are not aware of all the tax consequences and pitfalls.

When it comes to an interest-free loan, all borrowers and lenders should therefore think of the gift tax first: In principle, this also applies to anyone who receives an interest-free loan without any consideration. Especially if the loan has a term of more than a year. However, apply Exemptions from tax liability: The closer the degree of relationship, the higher they are. However, if the exemption limits are exceeded, taxation can still be more advantageous than a bank loan that usually bears interest.

Note: In any case, with larger loan amounts, it makes sense to get professional advice from a tax expert in advance about possible advantages and disadvantages depending on the case and tax situation.

Consider gift tax

If you want to grant an interest-free loan, you should watch out for a possible tax trap: Since no interest payments are agreed between the lender and the borrower, the tax authorities cannot wrongly suspect a gift. Especially with Loans outside of relatives (e.g. friends) the granted allowances or the term of one year can quickly be exceeded. So here it is particularly important to pay attention to the tax exemptions: There is a one-time payment of 20,000 euros within ten years, if there is no degree of relationship.

On the other hand, loan interest does not always protect against taxation: If the interest rate is set too low, the tax authorities will object. In any case, these will compare the interest rate granted with the current bank interest rates for a comparable loan. In the event of significant deviations, the tax office assumes a partial donation. According to the difference, it will calculate the taxes due.

example: Two business friends agree on an interest-free loan in which an amount of 150,000 euros is lent. The repayment is to be staggered over the next eight years. At a bank, the borrower would currently have to pay an interest rate of 4.0 percent. Viewed over the term, this would result in interest of EUR 25,525.56.

The borrower belongs to tax class III and has to tax gifts of up to 75,000 euros at a tax rate of 30 percent. In this case, the tax is calculated as follows:

tax calculationAmounts
÷ personal allowance
= taxable acquisition

Keyword: Gift tax exemptions

To avoid gift tax when granting interest-free loans, the applicable tax exemptions should be observed. The tax authorities only grant the full tax allowance once every ten years. Here is an overview of the exemptions depending on the degree of relationship:

Degree of relationshipTax allowance in euros
Spouses and life partners
Children and grandchildren whose parents have died (including stepchildren and adopted children)
Parents and grandparents: inheritance
Parents and grandparents: gifts, siblings, nieces, nephews, children and parents-in-law, step-parents

Contract is mandatory for an interest-free loan

Often a sensitive topic and in a nutshell in the Anglo-Saxon world: Money and friendship do not get along ("Friends and money don’t mix."). Therefore, the advice should be followed: With small amounts trust is good, with larger amounts of money it should be dealt with reason and clear rules. So if a private loan is granted, a written loan agreement is recommended. Here, too, the conditions should be specified and rights and obligations should be regulated for both sides. This also prevents possible misunderstandings and disputes later, for example with the exact loan amount or repayment.

In principle, the private loan contract is not tied to a specific form. It can be concluded either in writing or orally. The latter, however, is not recommended for the reasons mentioned. Among other things, a personal loan agreement should contain these points:

  • Contract leader: Name and address of borrower and lender

  • Key data of the loan: Loan amount, payment method and recipient's account details

  • Interest: Be sure to mention the interest-free grant

  • Purpose and use: Any earmarking

  • Collateral: Possible transfer of property and values

  • Repayment: How should the repayment be made?

  • Termination options: Extraordinary and regular, also with a view to remaining debt or payment default

  • Final regulations: Reference to invalid verbal ancillary agreements, severability clause (performance of the contract applies even if individual components of the contract may be or become ineffective)

  • Signature: From both sides of the contract (borrower and lender) with place and date

If a private loan agreement is concluded, each side is free to include additional and individual regulations.

Note: If a written contract raises concerns and would disrupt the friendly or family relationship, another approach is recommended. Then at least the interest-free loan amount should not be paid out in cash, but rather by bank transfer to the borrower. When making the transfer, the purpose of the transfer must at least be named as “loan”. In the event of a dispute, this makes it easier to prove later that the money was not given and the borrower actually still owes the outstanding amount.

Further legal regulations

In the case of an interest-free loan by contract, the borrower can repay the loan without giving notice. He can do that anytime. And for the rare case in practice, the following applies: If an interest-free loan is agreed, the borrower does not have to call up or receive the money.

Conclusion: Don't carelessly give out interest-free loans

Even if the giver and the borrower know and trust each other well in an interest-free loan, sometimes talking about it is “silver”, but writing what has been agreed in a contract is worth “gold”. It is therefore not uncommon for relatives and acquaintances to record the important things in private loans between relatives and friends in a loan agreement. Anyone who wants to avoid the gift tax should not give interest-free loans without further knowledge and good advice.