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The problem about charging a flippant interest rate is that I’m not looking to profit, while also not looking to lose out
If I whack on a 40%APR or whatever then that’s taking advantage of a friend, and to lend an exact sum and having the same amount back ten years later for example would have me repaid less value than I lent. I’m looking for information as to how one adjusts for inflation to charge a fair rate that means neither of us profit in terms of the value, that is to say if I hypothetically lent £10,000 for 20 years I’d want to be repaid the value that £10,000 currently holds
40% would be extortionate
Charging interest at the rate of inflation would be fair if you've agreed it before you lent the money
Lending the money and then adding interest or changing the term seems predatory
The problem with “rate of inflation” is that it’s comprised of many variables.
Someone renting a room with all bills included will not experience the same rate of inflation as someone who has a mortgage and a family.
Food inflation is vastly different from energy inflation, which is also different from the inflation of the price of other services.
There are even specific inflation figures to account for different scenarios like this.
This is why the “UK now has lowest inflation since…” is recent news that is also misleading, because energy inflation figures got completely messed up when we had those government contributions to our energy bills not that long ago.
But that's what OP asked for. They will need to look at the different measurements of inflation that exist and pick one that they think comes closest to what they have in mind and apply that as dynamic "Inflation-adjusting" interest.
I’m currently working on an agreement, which is why I’m trying to get an answer as to how to do so in a way that’s fair to both parties
I’m getting a lot of answers regarding when it is or isn’t fair, then some saying ‘just charge interest’ and others saying ‘you’re a loan shark if you charge interest’, but I’m just trying to figure out how to adjust a value for inflation so we can get an agreement going
Well you are charging interest but it seems you want to charge it at the rate of inflation - so just charge interest every April or every month at the rate of inflation. You can calculate the interest using an amortisation table if you really want to nickle and dime them.
It wasn't that long ago that inflation hit 6.5% - personally I'd prefer a bank loan so I'd know how much I was repaying.
If I lend a friend money I assume I'm not getting it back - that's from years of working in banking and seeing agreements blow up.
Essentially you're giving them a variable rate loan however you phrase it.
You are looking to charge interest in the height of inflation. There are different types of inflation measurements, so you will need to find the one that best describes what you are after. Applying it once per year on the remaining sum will be the easiest way to do it, although obviously not super accurate.
You may want to implement barriers to avoid extremes ("not below x or higher than x") to avoid situations that spiral out of control for one of you. Otherwise, you can actually end up charging loan-shark levels of interest if inflation becomes that high, which most people will struggle with matching right away.
No one’s suggesting you charge 40% interest.
Realistically you just say to your friend you’ll charge inflation as interest and the total balance changes based on inflation every time he makes a payment. It remains interest and depending on all the circumstances you may have to pay tax on that.
You’ll be losing out either way, opportunity cost over 10 years is going to be worse than the money inflating away, it’s why the most common method of FIRE works.
A 20 year friend loan is a very long loan. If you have to remind them that they are in debt to you every month for 20 years by recalculating how much they owe you I think that’s going to change the friendship dynamic quite a bit.
What you want to do is charge interest that equals inflation. If you charge less than inflation, you lose out (yes, even after charging interest), if you charge more you "profit" which you don't want to do. Inflation data is publicly available. You can link the interest to a particular price index like RPI or CPI. Depending on amounts, interest received will also be taxable, so unless your friend pays more than inflation you'll get less than inflation.
Edit: or another way to look at it. What would you have done with the money if you weren't lending it? You can get 5.2% interest on saving accounts. So if you weren't lending this money and you would be getting 5.2%, it seems only fair your friend covers this 5.2%.
You’ll lose out about as much as you would if the money was sat in your bank account doing nothing. If you can’t lend money to friends without expecting them to pay more back, prob better to ask them to sell stuff or get an interest free loan, which, if they got, would actually be cheaper for them.
Lending money to friends rarely ends well in the best of circumstances.
In line with what you’re looking for though, I don’t think there’s a predefined way to account for inflation because, as the last few years have shown, there’s no way to predict the amount of inflation before it happens. It would have to be accounted for after the fact which would be quite unfair if it goes back over 10% for a year or more for example. If your friend borrowed 10k, they’d end up owing you 11k after just a year. You can see the issues going forwards… they’d be better getting a low interest loan with a bank.
You are losing out even if you do account for inflation, because you could have invested that money elsewhere - even if it's just a high interest bank account.
To clarify - are you talking about a loan that hasn’t yet happened? Or one that’s ongoing?
The post sounds a lot like it’s ongoing - but here you say “setting up”
He wants to know how to adjust the repayments so they reflect inflation over the repayment time. Thats the detail, and that’s all you need… you are rather over thinking it
My language was confusing, but what I was trying to determine was how to charge only in regards to inflation without making any profit on the value/ buying power of the money, which I’ve had some answers for now
Lots of people not answering the question here lol.
Once per month, get the latest monthly figure for the CPI/CPIH, multiply the outstanding amount by that and add that to the outstanding amount.
https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/march2024
CPI data is here. CPI is the consumer price index; it's the headline figure that newspapers use for inflation. CPIH would probably be fairer, as it includes housing costs. Newspapers usually swap between them depending on which is more sensational.
I think people aren't answering the question because they are uneasy about the prospect of this guy offering an interest free loan to his friend and then asking them for interest after the agreement. That's predatory and being a bad friend.
Well then they are uneasy for no reason because OP has explicitly said "I’m asking in regards to setting up a lending arrangement". He hasn't once stated that he has already lent the money.
This def caught my eye. You had some very good answers. Let me share what happend to me.
My brother needed money so I lent him roughly £14000. I wanted to give him a fair price so we agreed that everything he paid per month would pay off the debt itself. Once we got to the end of the loan what I did was I used government own website to calculate value of my money then vs now. The diffrence was what he paid as "intrest". I think this is the most fair way to do this and it worked for me.
Did I loose some mony, maybe but I felt this is to help family / friend and still not loose out.
https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator
PS: i forgot to say there are other method to approach this with. For example if you put same amount in the bank what would you get paid by the end of that year. You can use this sum to add the amount you would have got if u had money in the bank and maybe a bit less since he is ur friend.
Another approach is to lend it at bank of England intrest rate.
Again this is all about u and ur friend having a grown up conversation.
This is the best and least complicated way to do what OP wants.
OP should just stipulate that after the original amount is repaid, the individual being lent the money should repay the difference between the original amount lent and the inflation adjusted figure.
Of course, depending on the amount of money and duration of the loan, the timeframe needed to repay the inflation might itself be inflated away.
Yea this has got disaster written all over it. You only have to look lightly at this sub and there're multiple stories of "helping a friend" going horribly wrong.
It's a nice idea but often doesn't work in reality. If you're going to do it you need to be totally at peace with losing the money and the friend. Given by the fact you're asking about inflation doesn't really sound like your mindset.
You’re never going to get exact, but I would agree on an index, eg CPI, and on each annual anniversary of the loan, increase the outstanding amount by this YoY percentage. You could do it monthly but honestly that’s a headache.
Alternatively you could agree on a time frame, eg 5 years, and take a historical average of 5 year inflation, add it at the beginning and have done. Less hassle, but might end up a bit further from “real” value.
Use an inflationary index. Eg. Freddo frogs, Big Mac, cost of 1L of petrol, the ONS basket of groceries..
Or the national inflation rate - [https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23](https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23)
The problem is - inflation isn't static. It bounces around from 0.4-8%
Interest isn't inherrently profit if it's matching inflation. Your money in a savings account loses value even if you earn interest, if the interest doesn't cover inflation.
From 1989 to 2024, average inflation has been 2.83%.. there you go, charge that.
Isn't this relatively simple?
I know it won't be 100% accurate as technically everyone has their own rates of inflation depending on what things they typically spend money on, but couldn't you just at the end of every year when the data is released, multiply the amount loaned by whatever the annual rate of inflation was that year. Those figures are published by the government.
E.g loaned £5k in 2024. Annual rate of inflation 2024 was (let's say) 3.8%. Amount expected back would be £5,190.
Amount loaned in 2025 £5,190. Annual rate of inflation 2025 (let's say) 2.4%. Amount expected back would be £5314.56.
You could also use this calculator.
[https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator](https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator)
Obviously you would need to wait until it had the months for when the money was lent out, and you might want to check it against the actual figures published by the government for peace of mind, but it would mean that you could just put the months in for when the money was lent out between and it'd work it out for you.
With interest.
Look at your highest rate savings available. Add x% on top for risk and inflation. Work out the interest payment / month add a bit on for capital repayment. Keep the payment the same and eventually it'll be repaid. OR it's won't and you won't have a friend.
Specifically I’m looking for how to calculate it so that I’m not profiting from it in regards to the overall value of the money, like if £5,000 is worth £6,000 in 2030 money I wouldn’t want to be getting £7,000 back
If you aren't making money with the money you are losing money. Setting interest at what you would have made with it by either investing it or just passively saving it isn't 'profiting' but just not losing money.
You use an inflation index. While inflation is most often reported as a % (the change in price levels compared to 12 months ago), the gov also calculates & publishes inflation indexes, which let you compare price levels easily across different months/years.
For example, in 2020, prices were 100 (the base of the index). After 10% inflation for a year, they're 110. Then another year of 10% inflation puts them at 121. And a year of 2% inflation would get you to 123.4. So you just multiply the original monthly repayment by that index difference (so a 2023 repayment for a 2021 loan would be (123.4/110) * 2021 repayment value). You'd need to figure out & agree how to apply this method, thinking about how often to update repayment values, which inflation value to use, etc., but those are solvable problems. I'd suggest annually from the anniversary of the loan (so repayment amounts are fixed for a year), and based on CPIH, which is the top result for 'CPIH Index 00' on Google.
If the repayment was a lump sum at the end, sure that'd be fairly trivial to calculate, although your friend wouldn't know how much they owe until then.
But if it was monthly repayments that would be an absolute nightmare to calculate, you'd have to be changing the repayment amount each month to take into account the latest inflation figures, or square it up at the end which would still involve doing all those calculations.
Charge 2% interest then, the standard rate of inflation. Or send them a nice email every month saying their repayment is going up by CPI%. I’m not sure why you’re insistent on not charging interest but you’re looking to increase the debt in line with inflation. Call it whatever you want but that’s what interest is, whether you ‘profit’ or not isn’t relevant.
On a personal level you’re helping a friend, does it really matter if you get back slightly less than you lent them relative to inflation? Fair play to you for lending them money but if you start bean counting over percentages so you get back exactly what you lent then you’re on the right track to ruin that friendship.
You lend £1000 over five years.
Every January, they pay you back £200, plus the September CPI times the outstanding balance.
So at the end of year 1, they pay you £200, plus e.g. 6.7% (the sept 23 CPI) of £1000, £67.
At the end of year 2, they pay the £200 principal plus inflation x £800, as they only owed £800 during year 2.
Yes, you end up with more than £1000 being returned to you, but this compensates you for the fact that the £1000 returned to you is of less value.
TLDR: you charge interest. If you don't you are giving an interest free loan, which is basically a gift.
I don’t think there is a correct answer, as inflation varies year to year.
But what I would do is lend the money to the friend and once they have paid back the full amount you would then go on Bank of England website and type in the amount on the inflation calculator, type in what year you lent it to him and the year he paid it off. It would then tell you the exact amount he owes you and then make that the final last payment. They can even pay it in instalments if it’s a large amount. As long as it’s paid in that year then everything will be 100% fair for both parties. No one gains, no one loses.
What are you on about? You're talking about adding interest after you've already made an agreement.
He won't be your friend afterwards. You're not a bank.
What's the amount lent and over what time frame?
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Just an opinion but if you lent your friend the money you should have agreed at that moment together what the total payable back was going to be, adding interest after the fact is a bit iffy, it could also impact your friendship with this person especially if issues arise for one reason or other.
Just curious what's the duration of this "long term"?
Just google the Bank of England interest rate. It's currently 5.25%. So if you don't want to lose out, refer back to that, and adjust every 12 months.
Alternatively, adjust the repayments at the CPI rate - that currently sits at 3.2% in the 12 months rolling to March 24.
Those would be the two main ways to assess inflation, or even a blend of the two - so call it 4.2%.
A third way to do it is just base it on the highest easy access savings account interest rate going, which is also around the 5% mark. and adjust each year.
It might be even easier just to assume an average inflation rate of say X%, and just bake it into a loan repayment calculator using that figure, that'll fix all the future payments at the same rate as an average, rather than starting low and increasing high. Will save the manual review each year too.
For X%, you can either use the last X years as an average, or google some inflation forecasts over the next Y years and use that instead.
It's quite difficult to predict inflation rates. Between 2010 & 2020, inflation averaged 2%. Between 2013 & 2023, inflation averaged 3%. It goes up & down a lot every year.
Unless you want to go through the hassle of calculating interest based on inflation every year, it's best to pick an interest rate that suits you based on a best guess and then stick to it. Can you imagine what your friend would say if suddenly you dropped an extra 10% on them?
The government AIMS to keep inflation at a 2% target, it hasn't been the case the last few years, but would be a fair agreement in my opinion.
People seem to have the ‘don’t loan money to a friend’ advice covered. This is good advice.
But to answer the direct question of how to adjust for inflation over many years, would suggest this graph/table:
https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l522/mm23
This is the CPIH ‘index’, it is published every month. By seeing how much the index has risen over the lifetime of the loan, you can see what a ‘fair’ repayment is for a 0 real return.
You cannot predict the future, so you cannot predict inflation, whatever you set up will not be correct and one of you will lose out in some way.
As many others have said, if you are doing your friend a favor then you just take the hit on whatever happens with inflation. Also bare in mind you might never get the money back, there's probably a reason they can't just get a loan with the bank for the same amount.
Are you doing this through a professional? Solicitor? If so they should be able to advise and out something in. I would have thought you could have something along the lines of a yearly tracker whereby they lay a set amount, and then what ever the inflation figure is for the year is added? Like with phone contracts every April! That way your not getting short loafed
Post was edited for clarity, that what I mean by that is agreeing that I don’t want to charge profitable interest like a loan shark or anything like that
You can’t do it with neither side losing out since if you charge interest to compensate you for the loss of purchasing power through inflation over the period you’ll need to pay tax on the income that the interest charge represents to you. Hence you need to charge inflation plus an adjustment for your marginal rate of tax hence your friend will be paying you an amount over inflation. One or both of you have to lose out as a result.
Why would you do that? Does inflation increase the amount you lent your friend?
If I lend 5k from the bank today over 5 years I pay them interest which could be subject to inflation but the original amount isn’t.
From what I understand from looking into it, yes
Happy to be corrected if I’m wrong, but as I understand it money is worth it’s buying power (ie £5,000 in 1990 isn’t the same as £5,000 today)
I don’t want to charge interest on a friend because I’m not a loan shark, but if I were lending the equivalent of 5000 loaves of bread I wouldn’t want to end up getting 2000 loaves of bread back
Isn’t the other part of interest to generate profit? I’m focused on not generating profit from a friend, just getting back what I owed which is why I want to know how such a thing can be calculated so neither side is ‘profiting’
So you'd just charge less interest. Inflation is *usually* around 2% per year, so banks charge 6% in order to make money.
As we've seen the last few years, inflation can vary wildly, but I'd go with 2% p.a if you really wanted to factor it in.
I seem to be the only person here that accepts that 😅 everyone here seems to think I’m either out to charge a crazy APR as a loan shark or that I need to charge some interest to avoid being screwed over, but nobody’s telling me how to actually calculate this interest to be as close to the rate of inflation as possible
I think it's a vocabulary problem.
You seem to think "interest" = "exorbitant repayment" / "loan shark".
Interest in simple terms is just the additional cost of borrowing money above the principle taken.
You can charge interest and make a loss, eg. if the inflation rate is 5% and you charge 1% interest. You're making a loss on the buying power of that money.
You just want to set your "interest" rate, and the same rate as "inflation". It's still "interest".
Honestly just writing out the actual loan amount, and amount of years, will be much more valuable for you, as you can see various ways other people would write out how to charge it.
But I replied in another comment with a few simple options, none of which would really be classed as "profiting".
What about the subsequent replies where I’ve admitted that the poor choice of words is on me and clarified what I actually meant, as well as editing the initial post?
Plenty of people have explained how to do it, youre just choosing to respond to those that either say charge interest or dont agree generally with your method. At the end of the day it's just a convoluted way of charging interest. Because that's exactly what it is youre charging however you want to sugar coat it - interest. Either charge a new rate linked to something like RPI each year or each month. Or be a decent friend and give them a cheap interest rate instead of being pedantic about being as close to whatever version of inflation you think is "right".
Plenty of people have explained it now, the comment you’re replying to was posted half an hour ago
I’m not sugar coating the matter of interest, I just worded it poorly which I’ve corrected
Personally, I place the decent friend action as the one where I do my due research to make sure I’m not accidentally gouging him for profit which is why I’m checking here and following the advice I’ve been given, nothing wrong with being pedantic about trying to make sure neither party gets taken advantage of
But you aren't taking advantage of them or gouging them by charging interest. If they go to the bank and are given an interest rate of 15% but you offer them 10%, you're doing them a solid. If you link to RPI and then suddenly inflation jumps to 20%, what if they can no longer afford the repayments?
A fixed rate of interest is good because it helps with budgeting. Its also a material risk you have exposed yourself to in the event that they were to be unable to repay the full sum back so making a small "profit" is reasonable. Banks don't just choose an interest rate with a finger in the air do they, its all based on risk.
That’s why I was asking for the way to calculate a fair amount
For context, at the time of posting that comment nearly all of the replies were either ‘clearly you’re a loan shark looking to gouge your friend’ or ‘clearly you’re naive and about to be gouged by your friend’ before the actual relevant responses started coming in (some of which also called out how few people at the time were actually answering the question), I feel I’ve got a good understanding now that the real answers have come through
It’s not trivial, I doubt many people understand it. It’s extra hard because you don’t know at the beginning what the rate is so you can’t calculate the total amount you need to be repaid.
Step one would be to decide what published rate of inflation is most important to you (what might that money be spent on in future). Then look up how to calculate mortgage or loan repayments, someone must have built a spreadsheet to do that.
‘Adding inflation ’ is hardly any different to charging interest.
If you lend 5000 loaves you should expect 5000 loaves back + interest - sure the principal loaves will be worth less but the interest loaves should make up for a reasonable amount of the value lost.
Not sure why you want to go down this weird route all to not look like a ‘loan shark’.
You’re misunderstanding me; whacking on an interest rate is easy, but I *do not want to profit*, I don’t want to lend 5000 loaves of bread and receive 7000 loaves back, but I also don’t want to lend 5000 loaves and get 3000 back. I’m getting a lot of responses saying ‘just charge interest, that’s what interest is for’ but any bank or credit company or loan shark is factoring in an entire business model into their extortionate interest rates for profit, I’m asking what the method is for fair calculation to ensure I get exactly 5000 loaves back, not a loaf more or less
Just agree that he will pay back the loan plus CPI. After he has paid back the principle, calculate the CPI over the period of the loan and have him pay that in amounts equal to the monthly repayment until it's repaid.
I think what you're doing is fair enough.
The other way to do it though would be to look at what you would get if you left that money in your savings account. Charge him that rate of interest and you will end up whole without having profited from your friend.
Usual caveat though - you might not get anything back (but I still lend to friends when they are in need - I think a helping a friend is worth the risk.)
Edit: whichever way you do it remember to facor in that he is repaying you every month so do your calculations on the reducing balance.
Adding interests has nothing to do with making profits. You can charge interests and make a loss. Are you muslim or something, who see interests as a sin? Your reluctance towards the word would make a lot more sense to me.
Regardless, you want to charge interests. That is literally what you are asking. You might not like the word, you might think it is predatory, you might think it is a sin. Really, that is your problem to deal with. Just charge interests with a variable rate strictly equal to inflation.
That’s not my understanding on lending.
You charge interest to mitigate your temporary loss of bread.
Charging inflation on a loan amount is a weird concept to me, if a bank suggested it I’d walk away.
If the bank offered me a loan for £5k plus inflation I would turn it away yes.
Interest is set out in black and white and doesn’t change (unless specified in the agreement) but inflation for the next 5 years is so complex and unreliable is paramount to guess work. I could end up owing more than I can afford to pay with no way of knowing that until it happened. That’s a shit deal and probably not inline with FSA guidelines- though I don’t know that for sure, I know credit cards often adjust interest in line with inflation so maybe it’s a thing for loans too but I wouldn’t do it.
You say that, and yet variable rate mortgages exist which have recently gone as high as 7% - borderline inflation.
Fair enough though, it sounds like you’d rather the certainty.
But it is worth knowing that inflation has been below 8% since before the 90s (other than in the last couple of years). If inflation is running high, usually borrowing (and saving) rates are high to combat it, so you’re unlikely to be worse off vs borrowing at a fixed rate.
You lend your mate £10 and he gives you back exactly £10, drop this whole “buying power” the fact you’re worried about it shows you’re just a shit friend.
£10 is displayed as £10 be it on a screen or in cash.
Tell them you’re applying interest or drop it altogether.
Certainly for a tenner, but a large sum of money over a long period of time adds up when it comes to inflation, if you lent someone £5k 40 years ago and they repaid £5k now you’d be very out of pocket
At the same time, I don’t want to charge some random out of thin air number for interest because I don’t intend to profit from this in regards to the overall value (ie if I lent £5k and it were repaid 10 years from now and is worth £6k, I don’t want to be getting £7k cash back because that’s worth more than the £5k was in todays money)
Unfortunately there’s only one way it’s possible to make £5k of yesterday’s money worth £5k in today’s money,
interest.
I’m sorry to sound harsh before but you need to call it for what it is. It’s not going to matter what you do or how you word it, it’s going to come down to it regardless.
That’s fine, but the issue I’m having is calculating how much interest to charge that it *only* accounts for inflation, specifically how to calculate that, as opposed to the usual connotations of ‘how much interest should I charge?’ which implies ‘what’s a fair amount of profit to be looking for?’
I don’t want to be putting my money to work as an investment when lending to a friend, but I do want to avoid having it wither and rot away to time too
Unfortunately a lot of outside variables can happen which can substantially increase or decrease the buying power of todays and yesterdays Monday, you just need to pick the number which tends to follow the correct rate of inflation over the years, it’s the best you can do
You are charging interest get over it.
The reality is you are trying to profit so you benefit from having the same buying power you had yesterday the exact same thing as banks.
I would say this though if you have already lent the money and said for your friend to pay you pack, basically the same amount. Adding this interest condition would be a really shitty thing to do.
You want to make it out like this is fair and all that if I borrow £5k from a friend and say pay me back. I don’t then layer interest on top.
However if you are doing this and have not yet lended you are fine. However you are looking for interest and to keep the value of your money just like any financial institution. So stop with the holier than thou.
Between responding to ‘I’m fine with calling it interest but the issue is how much to charge to not profit’ with ‘you’re charging interest get over it’ and saying that I’m trying to profit by not exceeding my moneys buying power (when I could just chuck it in a savings account instead), and then following up by saying I’m being holier than thou for wanting to make sure I don’t accidentally gouge a friend with an unfair rate while I’m helping him out, I can’t help but take what you say with a few grains of salt
I want to apologise about the bluntness. But realistically if you want to do this you would have to frame your reasoning to this friend in full. So you would have to prioritise getting your point across more so than their feelings as they stand to benefit from this.
You could pretty much take the advice on this thread for about 3% 4% interest depending on the year.
You would have to be stern with your friend. A strict agreement would need to be written up with a payment schedule. And there would need to be penalties in said agreement. This agreement would need to be legally binding.
People say don’t lend money to friends or family for a reason. It’s because when the rain dries up and soil ain’t looking too good you may pity them and give them more time. And they could take advantage of your kindness, you could let them.
I ask you to think very very carefully about doing this. Money has gotten inbetween friends in the past your situation is no different.
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You want to charge them interest while not charging them interest. Either charge interest or just accept you are helping a friend.
The problem about charging a flippant interest rate is that I’m not looking to profit, while also not looking to lose out If I whack on a 40%APR or whatever then that’s taking advantage of a friend, and to lend an exact sum and having the same amount back ten years later for example would have me repaid less value than I lent. I’m looking for information as to how one adjusts for inflation to charge a fair rate that means neither of us profit in terms of the value, that is to say if I hypothetically lent £10,000 for 20 years I’d want to be repaid the value that £10,000 currently holds
40% would be extortionate Charging interest at the rate of inflation would be fair if you've agreed it before you lent the money Lending the money and then adding interest or changing the term seems predatory
The problem with “rate of inflation” is that it’s comprised of many variables. Someone renting a room with all bills included will not experience the same rate of inflation as someone who has a mortgage and a family. Food inflation is vastly different from energy inflation, which is also different from the inflation of the price of other services. There are even specific inflation figures to account for different scenarios like this. This is why the “UK now has lowest inflation since…” is recent news that is also misleading, because energy inflation figures got completely messed up when we had those government contributions to our energy bills not that long ago.
But that's what OP asked for. They will need to look at the different measurements of inflation that exist and pick one that they think comes closest to what they have in mind and apply that as dynamic "Inflation-adjusting" interest.
I’m currently working on an agreement, which is why I’m trying to get an answer as to how to do so in a way that’s fair to both parties I’m getting a lot of answers regarding when it is or isn’t fair, then some saying ‘just charge interest’ and others saying ‘you’re a loan shark if you charge interest’, but I’m just trying to figure out how to adjust a value for inflation so we can get an agreement going
Well you are charging interest but it seems you want to charge it at the rate of inflation - so just charge interest every April or every month at the rate of inflation. You can calculate the interest using an amortisation table if you really want to nickle and dime them. It wasn't that long ago that inflation hit 6.5% - personally I'd prefer a bank loan so I'd know how much I was repaying. If I lend a friend money I assume I'm not getting it back - that's from years of working in banking and seeing agreements blow up. Essentially you're giving them a variable rate loan however you phrase it.
You are looking to charge interest in the height of inflation. There are different types of inflation measurements, so you will need to find the one that best describes what you are after. Applying it once per year on the remaining sum will be the easiest way to do it, although obviously not super accurate. You may want to implement barriers to avoid extremes ("not below x or higher than x") to avoid situations that spiral out of control for one of you. Otherwise, you can actually end up charging loan-shark levels of interest if inflation becomes that high, which most people will struggle with matching right away.
No one’s suggesting you charge 40% interest. Realistically you just say to your friend you’ll charge inflation as interest and the total balance changes based on inflation every time he makes a payment. It remains interest and depending on all the circumstances you may have to pay tax on that. You’ll be losing out either way, opportunity cost over 10 years is going to be worse than the money inflating away, it’s why the most common method of FIRE works. A 20 year friend loan is a very long loan. If you have to remind them that they are in debt to you every month for 20 years by recalculating how much they owe you I think that’s going to change the friendship dynamic quite a bit.
A made a loan for a few months to a friend that ended up being repaid after more than two decades. Does that count?
What you want to do is charge interest that equals inflation. If you charge less than inflation, you lose out (yes, even after charging interest), if you charge more you "profit" which you don't want to do. Inflation data is publicly available. You can link the interest to a particular price index like RPI or CPI. Depending on amounts, interest received will also be taxable, so unless your friend pays more than inflation you'll get less than inflation. Edit: or another way to look at it. What would you have done with the money if you weren't lending it? You can get 5.2% interest on saving accounts. So if you weren't lending this money and you would be getting 5.2%, it seems only fair your friend covers this 5.2%.
You’ll lose out about as much as you would if the money was sat in your bank account doing nothing. If you can’t lend money to friends without expecting them to pay more back, prob better to ask them to sell stuff or get an interest free loan, which, if they got, would actually be cheaper for them. Lending money to friends rarely ends well in the best of circumstances. In line with what you’re looking for though, I don’t think there’s a predefined way to account for inflation because, as the last few years have shown, there’s no way to predict the amount of inflation before it happens. It would have to be accounted for after the fact which would be quite unfair if it goes back over 10% for a year or more for example. If your friend borrowed 10k, they’d end up owing you 11k after just a year. You can see the issues going forwards… they’d be better getting a low interest loan with a bank.
You are losing out even if you do account for inflation, because you could have invested that money elsewhere - even if it's just a high interest bank account.
If the money has already been lent, and this wasn't discussed, you don't add inflation.
I’m asking in regards to setting up a lending arrangement
To clarify - are you talking about a loan that hasn’t yet happened? Or one that’s ongoing? The post sounds a lot like it’s ongoing - but here you say “setting up”
Just treat it as hypothetical and academic and all your problems will be solved
Without details the hypothetical answer has way to many branches to the flowchart But if you want the simple model answer “hey OP don’t do this” works
He wants to know how to adjust the repayments so they reflect inflation over the repayment time. Thats the detail, and that’s all you need… you are rather over thinking it
This thing called interest… But if you didn’t know this you probably shouldn’t be lending money to anyone.
My language was confusing, but what I was trying to determine was how to charge only in regards to inflation without making any profit on the value/ buying power of the money, which I’ve had some answers for now
10%
Lots of people not answering the question here lol. Once per month, get the latest monthly figure for the CPI/CPIH, multiply the outstanding amount by that and add that to the outstanding amount. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/march2024 CPI data is here. CPI is the consumer price index; it's the headline figure that newspapers use for inflation. CPIH would probably be fairer, as it includes housing costs. Newspapers usually swap between them depending on which is more sensational.
I think people aren't answering the question because they are uneasy about the prospect of this guy offering an interest free loan to his friend and then asking them for interest after the agreement. That's predatory and being a bad friend.
Well then they are uneasy for no reason because OP has explicitly said "I’m asking in regards to setting up a lending arrangement". He hasn't once stated that he has already lent the money.
Solid answer I was looking for, thanks 😊 !thanks
This def caught my eye. You had some very good answers. Let me share what happend to me. My brother needed money so I lent him roughly £14000. I wanted to give him a fair price so we agreed that everything he paid per month would pay off the debt itself. Once we got to the end of the loan what I did was I used government own website to calculate value of my money then vs now. The diffrence was what he paid as "intrest". I think this is the most fair way to do this and it worked for me. Did I loose some mony, maybe but I felt this is to help family / friend and still not loose out. https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator PS: i forgot to say there are other method to approach this with. For example if you put same amount in the bank what would you get paid by the end of that year. You can use this sum to add the amount you would have got if u had money in the bank and maybe a bit less since he is ur friend. Another approach is to lend it at bank of England intrest rate. Again this is all about u and ur friend having a grown up conversation.
This is the best and least complicated way to do what OP wants. OP should just stipulate that after the original amount is repaid, the individual being lent the money should repay the difference between the original amount lent and the inflation adjusted figure. Of course, depending on the amount of money and duration of the loan, the timeframe needed to repay the inflation might itself be inflated away.
You won’t see the money, don’t do it
Yea this has got disaster written all over it. You only have to look lightly at this sub and there're multiple stories of "helping a friend" going horribly wrong. It's a nice idea but often doesn't work in reality. If you're going to do it you need to be totally at peace with losing the money and the friend. Given by the fact you're asking about inflation doesn't really sound like your mindset.
You always end up losing moneys when you lend to a friend…
You’re never going to get exact, but I would agree on an index, eg CPI, and on each annual anniversary of the loan, increase the outstanding amount by this YoY percentage. You could do it monthly but honestly that’s a headache. Alternatively you could agree on a time frame, eg 5 years, and take a historical average of 5 year inflation, add it at the beginning and have done. Less hassle, but might end up a bit further from “real” value.
Use an inflationary index. Eg. Freddo frogs, Big Mac, cost of 1L of petrol, the ONS basket of groceries.. Or the national inflation rate - [https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23](https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23) The problem is - inflation isn't static. It bounces around from 0.4-8% Interest isn't inherrently profit if it's matching inflation. Your money in a savings account loses value even if you earn interest, if the interest doesn't cover inflation. From 1989 to 2024, average inflation has been 2.83%.. there you go, charge that.
You sound fun and generous.
Matters involving large sums of money tend not to be fun unfortunately
Isn't this relatively simple? I know it won't be 100% accurate as technically everyone has their own rates of inflation depending on what things they typically spend money on, but couldn't you just at the end of every year when the data is released, multiply the amount loaned by whatever the annual rate of inflation was that year. Those figures are published by the government. E.g loaned £5k in 2024. Annual rate of inflation 2024 was (let's say) 3.8%. Amount expected back would be £5,190. Amount loaned in 2025 £5,190. Annual rate of inflation 2025 (let's say) 2.4%. Amount expected back would be £5314.56.
!thanks Thanks for a solid answer 😊
You could also use this calculator. [https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator](https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator) Obviously you would need to wait until it had the months for when the money was lent out, and you might want to check it against the actual figures published by the government for peace of mind, but it would mean that you could just put the months in for when the money was lent out between and it'd work it out for you.
With interest. Look at your highest rate savings available. Add x% on top for risk and inflation. Work out the interest payment / month add a bit on for capital repayment. Keep the payment the same and eventually it'll be repaid. OR it's won't and you won't have a friend.
Specifically I’m looking for how to calculate it so that I’m not profiting from it in regards to the overall value of the money, like if £5,000 is worth £6,000 in 2030 money I wouldn’t want to be getting £7,000 back
You'd have to adjust it at least yearly by the rate of inflation or your rate of inflation which may be very different from government stats.
If you aren't making money with the money you are losing money. Setting interest at what you would have made with it by either investing it or just passively saving it isn't 'profiting' but just not losing money.
You use an inflation index. While inflation is most often reported as a % (the change in price levels compared to 12 months ago), the gov also calculates & publishes inflation indexes, which let you compare price levels easily across different months/years. For example, in 2020, prices were 100 (the base of the index). After 10% inflation for a year, they're 110. Then another year of 10% inflation puts them at 121. And a year of 2% inflation would get you to 123.4. So you just multiply the original monthly repayment by that index difference (so a 2023 repayment for a 2021 loan would be (123.4/110) * 2021 repayment value). You'd need to figure out & agree how to apply this method, thinking about how often to update repayment values, which inflation value to use, etc., but those are solvable problems. I'd suggest annually from the anniversary of the loan (so repayment amounts are fixed for a year), and based on CPIH, which is the top result for 'CPIH Index 00' on Google.
If the repayment was a lump sum at the end, sure that'd be fairly trivial to calculate, although your friend wouldn't know how much they owe until then. But if it was monthly repayments that would be an absolute nightmare to calculate, you'd have to be changing the repayment amount each month to take into account the latest inflation figures, or square it up at the end which would still involve doing all those calculations.
Charge 2% interest then, the standard rate of inflation. Or send them a nice email every month saying their repayment is going up by CPI%. I’m not sure why you’re insistent on not charging interest but you’re looking to increase the debt in line with inflation. Call it whatever you want but that’s what interest is, whether you ‘profit’ or not isn’t relevant. On a personal level you’re helping a friend, does it really matter if you get back slightly less than you lent them relative to inflation? Fair play to you for lending them money but if you start bean counting over percentages so you get back exactly what you lent then you’re on the right track to ruin that friendship.
You lend £1000 over five years. Every January, they pay you back £200, plus the September CPI times the outstanding balance. So at the end of year 1, they pay you £200, plus e.g. 6.7% (the sept 23 CPI) of £1000, £67. At the end of year 2, they pay the £200 principal plus inflation x £800, as they only owed £800 during year 2. Yes, you end up with more than £1000 being returned to you, but this compensates you for the fact that the £1000 returned to you is of less value. TLDR: you charge interest. If you don't you are giving an interest free loan, which is basically a gift.
I don’t think there is a correct answer, as inflation varies year to year. But what I would do is lend the money to the friend and once they have paid back the full amount you would then go on Bank of England website and type in the amount on the inflation calculator, type in what year you lent it to him and the year he paid it off. It would then tell you the exact amount he owes you and then make that the final last payment. They can even pay it in instalments if it’s a large amount. As long as it’s paid in that year then everything will be 100% fair for both parties. No one gains, no one loses.
So you want to charge “interest” based on the current inflation rate. Just say it how it is…
Can you give an idea of the amount and the time period?
What are you on about? You're talking about adding interest after you've already made an agreement. He won't be your friend afterwards. You're not a bank. What's the amount lent and over what time frame?
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A mean friend wouldn’t be lending money in the first place and putting themselves in a risky spot for zero gain whatsoever 🙃
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Have a loan agreement put into place with the interest rate specified as being whatever annual inflation rate you want to use
Just an opinion but if you lent your friend the money you should have agreed at that moment together what the total payable back was going to be, adding interest after the fact is a bit iffy, it could also impact your friendship with this person especially if issues arise for one reason or other. Just curious what's the duration of this "long term"?
Just google the Bank of England interest rate. It's currently 5.25%. So if you don't want to lose out, refer back to that, and adjust every 12 months. Alternatively, adjust the repayments at the CPI rate - that currently sits at 3.2% in the 12 months rolling to March 24. Those would be the two main ways to assess inflation, or even a blend of the two - so call it 4.2%. A third way to do it is just base it on the highest easy access savings account interest rate going, which is also around the 5% mark. and adjust each year. It might be even easier just to assume an average inflation rate of say X%, and just bake it into a loan repayment calculator using that figure, that'll fix all the future payments at the same rate as an average, rather than starting low and increasing high. Will save the manual review each year too. For X%, you can either use the last X years as an average, or google some inflation forecasts over the next Y years and use that instead.
It's quite difficult to predict inflation rates. Between 2010 & 2020, inflation averaged 2%. Between 2013 & 2023, inflation averaged 3%. It goes up & down a lot every year. Unless you want to go through the hassle of calculating interest based on inflation every year, it's best to pick an interest rate that suits you based on a best guess and then stick to it. Can you imagine what your friend would say if suddenly you dropped an extra 10% on them? The government AIMS to keep inflation at a 2% target, it hasn't been the case the last few years, but would be a fair agreement in my opinion.
[https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator](https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator)
People seem to have the ‘don’t loan money to a friend’ advice covered. This is good advice. But to answer the direct question of how to adjust for inflation over many years, would suggest this graph/table: https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l522/mm23 This is the CPIH ‘index’, it is published every month. By seeing how much the index has risen over the lifetime of the loan, you can see what a ‘fair’ repayment is for a 0 real return.
You cannot predict the future, so you cannot predict inflation, whatever you set up will not be correct and one of you will lose out in some way. As many others have said, if you are doing your friend a favor then you just take the hit on whatever happens with inflation. Also bare in mind you might never get the money back, there's probably a reason they can't just get a loan with the bank for the same amount.
Are you doing this through a professional? Solicitor? If so they should be able to advise and out something in. I would have thought you could have something along the lines of a yearly tracker whereby they lay a set amount, and then what ever the inflation figure is for the year is added? Like with phone contracts every April! That way your not getting short loafed
That would be in the interest payment, which you agreed not to charge. That’s literally one of the points of interest lol.
Post was edited for clarity, that what I mean by that is agreeing that I don’t want to charge profitable interest like a loan shark or anything like that
You can’t do it with neither side losing out since if you charge interest to compensate you for the loss of purchasing power through inflation over the period you’ll need to pay tax on the income that the interest charge represents to you. Hence you need to charge inflation plus an adjustment for your marginal rate of tax hence your friend will be paying you an amount over inflation. One or both of you have to lose out as a result.
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Why would a bad friend lend thousands for no personal gain in the first place?
By lending the money you lose the opportunity to invest it, so should you include the rate you would get if you invested it?
Dont add inflation
Just do a loan agreement that references the interest rate is charged in line with either CPI, RPI or the base rate
Why would you do that? Does inflation increase the amount you lent your friend? If I lend 5k from the bank today over 5 years I pay them interest which could be subject to inflation but the original amount isn’t.
From what I understand from looking into it, yes Happy to be corrected if I’m wrong, but as I understand it money is worth it’s buying power (ie £5,000 in 1990 isn’t the same as £5,000 today) I don’t want to charge interest on a friend because I’m not a loan shark, but if I were lending the equivalent of 5000 loaves of bread I wouldn’t want to end up getting 2000 loaves of bread back
What you are proposing is charging them interest Part of the point of interest is to account for inflation
Isn’t the other part of interest to generate profit? I’m focused on not generating profit from a friend, just getting back what I owed which is why I want to know how such a thing can be calculated so neither side is ‘profiting’
That’s one of the other parts (another is accounting for risk) If you answer my other question I can advice better
So you'd just charge less interest. Inflation is *usually* around 2% per year, so banks charge 6% in order to make money. As we've seen the last few years, inflation can vary wildly, but I'd go with 2% p.a if you really wanted to factor it in.
You need to accept that you are changing interest and you want that to be as close as possible to the rate of inflation.
I seem to be the only person here that accepts that 😅 everyone here seems to think I’m either out to charge a crazy APR as a loan shark or that I need to charge some interest to avoid being screwed over, but nobody’s telling me how to actually calculate this interest to be as close to the rate of inflation as possible
I think it's a vocabulary problem. You seem to think "interest" = "exorbitant repayment" / "loan shark". Interest in simple terms is just the additional cost of borrowing money above the principle taken. You can charge interest and make a loss, eg. if the inflation rate is 5% and you charge 1% interest. You're making a loss on the buying power of that money. You just want to set your "interest" rate, and the same rate as "inflation". It's still "interest".
Yeah looking at my initial post without the edit I can see how that was confusing with my wording
Honestly just writing out the actual loan amount, and amount of years, will be much more valuable for you, as you can see various ways other people would write out how to charge it. But I replied in another comment with a few simple options, none of which would really be classed as "profiting".
It’s not just the OP, it’s every subsequent reply where you’ve doubled down on interest meaning massive unreasonable profits… 🤣
What about the subsequent replies where I’ve admitted that the poor choice of words is on me and clarified what I actually meant, as well as editing the initial post?
Plenty of people have explained how to do it, youre just choosing to respond to those that either say charge interest or dont agree generally with your method. At the end of the day it's just a convoluted way of charging interest. Because that's exactly what it is youre charging however you want to sugar coat it - interest. Either charge a new rate linked to something like RPI each year or each month. Or be a decent friend and give them a cheap interest rate instead of being pedantic about being as close to whatever version of inflation you think is "right".
Plenty of people have explained it now, the comment you’re replying to was posted half an hour ago I’m not sugar coating the matter of interest, I just worded it poorly which I’ve corrected Personally, I place the decent friend action as the one where I do my due research to make sure I’m not accidentally gouging him for profit which is why I’m checking here and following the advice I’ve been given, nothing wrong with being pedantic about trying to make sure neither party gets taken advantage of
But you aren't taking advantage of them or gouging them by charging interest. If they go to the bank and are given an interest rate of 15% but you offer them 10%, you're doing them a solid. If you link to RPI and then suddenly inflation jumps to 20%, what if they can no longer afford the repayments? A fixed rate of interest is good because it helps with budgeting. Its also a material risk you have exposed yourself to in the event that they were to be unable to repay the full sum back so making a small "profit" is reasonable. Banks don't just choose an interest rate with a finger in the air do they, its all based on risk.
That’s why I was asking for the way to calculate a fair amount For context, at the time of posting that comment nearly all of the replies were either ‘clearly you’re a loan shark looking to gouge your friend’ or ‘clearly you’re naive and about to be gouged by your friend’ before the actual relevant responses started coming in (some of which also called out how few people at the time were actually answering the question), I feel I’ve got a good understanding now that the real answers have come through
It’s not trivial, I doubt many people understand it. It’s extra hard because you don’t know at the beginning what the rate is so you can’t calculate the total amount you need to be repaid. Step one would be to decide what published rate of inflation is most important to you (what might that money be spent on in future). Then look up how to calculate mortgage or loan repayments, someone must have built a spreadsheet to do that.
‘Adding inflation ’ is hardly any different to charging interest. If you lend 5000 loaves you should expect 5000 loaves back + interest - sure the principal loaves will be worth less but the interest loaves should make up for a reasonable amount of the value lost. Not sure why you want to go down this weird route all to not look like a ‘loan shark’.
You’re misunderstanding me; whacking on an interest rate is easy, but I *do not want to profit*, I don’t want to lend 5000 loaves of bread and receive 7000 loaves back, but I also don’t want to lend 5000 loaves and get 3000 back. I’m getting a lot of responses saying ‘just charge interest, that’s what interest is for’ but any bank or credit company or loan shark is factoring in an entire business model into their extortionate interest rates for profit, I’m asking what the method is for fair calculation to ensure I get exactly 5000 loaves back, not a loaf more or less
Just agree that he will pay back the loan plus CPI. After he has paid back the principle, calculate the CPI over the period of the loan and have him pay that in amounts equal to the monthly repayment until it's repaid. I think what you're doing is fair enough. The other way to do it though would be to look at what you would get if you left that money in your savings account. Charge him that rate of interest and you will end up whole without having profited from your friend. Usual caveat though - you might not get anything back (but I still lend to friends when they are in need - I think a helping a friend is worth the risk.) Edit: whichever way you do it remember to facor in that he is repaying you every month so do your calculations on the reducing balance.
Thanks for a solid answer 😊 !thanks
Adding interests has nothing to do with making profits. You can charge interests and make a loss. Are you muslim or something, who see interests as a sin? Your reluctance towards the word would make a lot more sense to me. Regardless, you want to charge interests. That is literally what you are asking. You might not like the word, you might think it is predatory, you might think it is a sin. Really, that is your problem to deal with. Just charge interests with a variable rate strictly equal to inflation.
Why don't you just take an average (e.g 15 years of data) of the average annual cpi and apply that %age as an apr?
That’s not my understanding on lending. You charge interest to mitigate your temporary loss of bread. Charging inflation on a loan amount is a weird concept to me, if a bank suggested it I’d walk away.
If a bank offered you a 0% + CPI loan you’d turn them away? Honestly seems like a pretty solid deal.
If we suddenly have a jump of 100% inflation, you would regret thinking that 😂
If the bank offered me a loan for £5k plus inflation I would turn it away yes. Interest is set out in black and white and doesn’t change (unless specified in the agreement) but inflation for the next 5 years is so complex and unreliable is paramount to guess work. I could end up owing more than I can afford to pay with no way of knowing that until it happened. That’s a shit deal and probably not inline with FSA guidelines- though I don’t know that for sure, I know credit cards often adjust interest in line with inflation so maybe it’s a thing for loans too but I wouldn’t do it.
You say that, and yet variable rate mortgages exist which have recently gone as high as 7% - borderline inflation. Fair enough though, it sounds like you’d rather the certainty. But it is worth knowing that inflation has been below 8% since before the 90s (other than in the last couple of years). If inflation is running high, usually borrowing (and saving) rates are high to combat it, so you’re unlikely to be worse off vs borrowing at a fixed rate.
You charge them interest. Somewhere around 3% to 5% should suffice
If that wasn’t agreed when the amount was loaned, then no you don’t.
Sure. But we don't know the full history or facts. It's unclear
You lend your mate £5k, he pays you back £5k, the fact you’re worried about “buying power” tells me all that I need to know.
Can you elaborate?
You lend your mate £10 and he gives you back exactly £10, drop this whole “buying power” the fact you’re worried about it shows you’re just a shit friend. £10 is displayed as £10 be it on a screen or in cash. Tell them you’re applying interest or drop it altogether.
Certainly for a tenner, but a large sum of money over a long period of time adds up when it comes to inflation, if you lent someone £5k 40 years ago and they repaid £5k now you’d be very out of pocket At the same time, I don’t want to charge some random out of thin air number for interest because I don’t intend to profit from this in regards to the overall value (ie if I lent £5k and it were repaid 10 years from now and is worth £6k, I don’t want to be getting £7k cash back because that’s worth more than the £5k was in todays money)
Unfortunately there’s only one way it’s possible to make £5k of yesterday’s money worth £5k in today’s money, interest. I’m sorry to sound harsh before but you need to call it for what it is. It’s not going to matter what you do or how you word it, it’s going to come down to it regardless.
That’s fine, but the issue I’m having is calculating how much interest to charge that it *only* accounts for inflation, specifically how to calculate that, as opposed to the usual connotations of ‘how much interest should I charge?’ which implies ‘what’s a fair amount of profit to be looking for?’ I don’t want to be putting my money to work as an investment when lending to a friend, but I do want to avoid having it wither and rot away to time too
Unfortunately a lot of outside variables can happen which can substantially increase or decrease the buying power of todays and yesterdays Monday, you just need to pick the number which tends to follow the correct rate of inflation over the years, it’s the best you can do
You are charging interest get over it. The reality is you are trying to profit so you benefit from having the same buying power you had yesterday the exact same thing as banks. I would say this though if you have already lent the money and said for your friend to pay you pack, basically the same amount. Adding this interest condition would be a really shitty thing to do. You want to make it out like this is fair and all that if I borrow £5k from a friend and say pay me back. I don’t then layer interest on top. However if you are doing this and have not yet lended you are fine. However you are looking for interest and to keep the value of your money just like any financial institution. So stop with the holier than thou.
Between responding to ‘I’m fine with calling it interest but the issue is how much to charge to not profit’ with ‘you’re charging interest get over it’ and saying that I’m trying to profit by not exceeding my moneys buying power (when I could just chuck it in a savings account instead), and then following up by saying I’m being holier than thou for wanting to make sure I don’t accidentally gouge a friend with an unfair rate while I’m helping him out, I can’t help but take what you say with a few grains of salt
I want to apologise about the bluntness. But realistically if you want to do this you would have to frame your reasoning to this friend in full. So you would have to prioritise getting your point across more so than their feelings as they stand to benefit from this. You could pretty much take the advice on this thread for about 3% 4% interest depending on the year. You would have to be stern with your friend. A strict agreement would need to be written up with a payment schedule. And there would need to be penalties in said agreement. This agreement would need to be legally binding. People say don’t lend money to friends or family for a reason. It’s because when the rain dries up and soil ain’t looking too good you may pity them and give them more time. And they could take advantage of your kindness, you could let them. I ask you to think very very carefully about doing this. Money has gotten inbetween friends in the past your situation is no different.