Should I charge interest on a personal loan?

• The amount is small relative to your means. Interest on a modest short loan is a rounding error to you and a recurring irritation to them.
• The term is short. Under a few months there is very little to charge for.
• It is family, and the money was sitting still. If it was in a current account doing nothing, you are not giving up a return; you are inventing one.
• They are borrowing because they are in trouble. Adding a rate to a loan someone took out of necessity makes repayment harder and repayment is the outcome you want.

Charging nothing is not being soft. A 0% loan still has a date, still has a schedule, and still gets recorded. The discipline comes from the terms being clear, not from the rate.

• The money had a job. If it was earning somewhere, or you had to sell something or break a deposit to free it, charging roughly what you gave up is fair and easy to explain.
• The loan is large or long. Over years, inflation alone means the amount coming back is worth meaningfully less than the amount that went out.
• It is commercial. Lending to someone for a business, for stock, for equipment — where the money is expected to generate a return — is an investment, and pricing it is normal.
• The alternative is far worse. Someone facing a payday lender or a credit card at 3–4% a month is genuinely better off at 1% from you, and both of you know it.

Private lending is agreed in monthly rates far more often than annual ones, so that is the unit to think in — and it is the unit LoanCompass uses. Be careful: 2% a month is not 2% a year, it is about 27% a year compounded, which is credit-card territory. The gap between those two readings is the most expensive misunderstanding in private lending.

Then be explicit about how it is charged. “2% a month” on a flat plan and on a reducing-balance plan are different prices for the same words — close to 80% apart over a year. Say which one you mean, and agree the total, not just the percentage.

• Lend less, interest-free. A smaller amount you are relaxed about beats a larger one you are pricing for risk.
• Index it instead of charging a rate. “Give me back what it is worth” is easier to accept than a rate, and it addresses the real erosion on a multi-year loan.
• Split it. Some as a gift, the rest as an interest-free loan, said plainly. Often what both people meant anyway.
• Take a share instead. If it is a business, an agreed share of the upside is more honest than debt — and it does not fall due when the venture is struggling.

What is lawful where you are. Many countries cap the interest a private individual may charge, and lending above certain thresholds or with any regularity can require a licence. Exceeding a cap can make the interest — occasionally the whole agreement — unenforceable.

How it is treated for tax. Interest received is taxable income in most places. Some jurisdictions also impute interest on interest-free loans above a threshold, meaning a 0% family loan can still have tax consequences.

Both vary far too much by country to summarise. If the amount is large, ask someone qualified locally before agreeing terms — nothing here is legal or tax advice.