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Thread: Loan repayments and interest

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    Loan repayments and interest

    Hi everyone

    If a client has taken a loan from her husband for the business, what is the formula to calculate repayments with interest?

    At the moment she is paying a fixed amount every month, but she would like to start calculating the repayments correctly using the correct repayment interest rate etc.

    Please help, this is not something I am clued up in at all... Thanks so much.

    Regards
    Raene

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    Diamond Member Blurock's Avatar
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    What is the interest rate and what are the terms?
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    Hi there

    That is basically what we are trying to figure out. How do you determine the interest rate and terms?

    Thanx

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    Diamond Member Blurock's Avatar
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    OK, Wife takes a loan from the husband. Where does the money come from? Is it invested and is he earning interest on it? How much? Does he want to earn interest on the money loaned to the wife? Why? Why does he not just give her the money or assist her with an interest free loan to set up her business? She will after all be generating an income for herself and will be contributing to the household income.

    How much can she repay per month? Can the business afford it? Would it not be better to wait until the business is established before starting to repay? Why does she have to repay the loan? Does he need the money for something else?

    I've asked these questions because it appears as if you are not clear about the terms and conditions of the loan yourself.
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    Hi Blurock

    You are correct. I am not clear about the terms and conditions... neither is the wife.... she is not sure of the standard practice in terms of loan repayments and interest etc.

    The money belonged to the husband, assuming he had it on hand from a matured invested etc. .... It was put into the business and now that the company is making money she is paying him a fixed amount back every month and calling it interest..... (not sure why she doesn't just call it loan repayment)

    He does expect a repayment every month for whatever reason and yes the business can afford it.

    What she wants to know is how much interest should she be paying? What is the current loan rate, if any? I assume they determine the term of the loan.

    Should he decide to give the balance of the loan to the company as a gift so that the business looks healthier on paper, what would the journal entries look like?

    Thanks for your help.

    R

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    from a taxation angle, husband is allowed to earn interest tax free to a point per annum (please check limit for this tax year), which interest is would be an expense in wife's business thus reducing her tax liability.Decide on a rate say,6%, calculate monthly on reducing balance.hope this helps. Perhaps a simple agreement between husband and wifes business spelling out rate & repayment terms could be kept in a file should there be queries

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    As flaker commented, there may be tax implications and you should rather discuss this with a qualified accountant (CA) or a tax consultant.

    Depending on the husband's tax situation he can leave the money in the business as equity and be paid a small salary or dividends. A tax expert may be able to give you better advice on how to get the maximum benefit. Rather pay a small fee and sleep well. Do not try to do it on your own.
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    Hi Raene, it's not easy giving advice without knowing more. These are some of the factors that will affect this:
    - is the business incorporated, or sole proprietor?
    - are they married in or out of community of property?
    - is the loan a material amount relative to the business and relative to the hubby?

    Essentially the terms and conditions are those that they tacitly agreed to when the loan was made. Of course they can by varied and revised by mutual agreement.

    There is not really a "best practice" answer.

    Regardless of how they are married, the husband is a connected person in terms of tax legislation and besides marital strife, that's the only issue you need to tread softly about.

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    Quote Originally Posted by CLIVE-TRIANGLE View Post
    Regardless of how they are married, the husband is a connected person in terms of tax legislation and besides marital strife, that's the only issue you need to tread softly about.
    Ditto that from me too.

    Given the connected parties aspect, you might need to be careful of the interest rate applied - but I'll leave giving ideas on numbers to the tax gurus.

    It also sounds like what you need is a loan amortisation calculator that produces an amortisation schedule.
    One of these loan amortisation templates for Excel should be up to the task.

    EDIT: Decided to attach one I use myself for all sorts of stuff.
    Attached Files Attached Files
    Last edited by Dave A; 18-Apr-13 at 04:38 PM.
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