25K due on credit card- unusual idea

[nbc]

Hi,
I owe 25K on 2 different credit cards- paying 10% interest.
My brother was asking me the other day where he should put money to get a decent return. Best he can get is about 3% or maybe a little more.
Then he came up with a suggestion. He could lend me the 25K, I pay off my credit cards and pay him a rate of 4%. Then there is the possibility that he may not have to pay DIRT(or maybe he does?).
Anyway I am happy to pay him 1% more than he would get in the bank.
Just a bit confused with working it out practically. I was going to pay him back E500 a month and to make it easier I was going to pay the entire years interest in advance and again at the start of following years- (assuming that I will have it paid off in 4 years or a bit more).
Now if he had it in a bank he would get 4% of 25K every year for 4 years but I will be paying him 4% on the reducing balance. When i pay him E500 every month he can put that in his bank and earn 3% on it. So I don't want to screw him and I'm confused with the figures. Is this a win win for the 2 of us? What effective interest rate will he be receiving? And does he have to pay dirt? And are there tax implications for me with my brother lending me the money?
Many thanks
nbc

 

[Brendan Burgess]

Hi nbc

First of all, is this a good idea?

You owe 25k on your credit card? Is there a good reason for building up this? Is it realistic to expect that you will be able to pay it off? Or put it another way, is there a risk that you won't be able to pay it off?

Most people who run up debts these size, have probably been unwise to some extent. If it's suddenly paid off, there is a very strong chance, that you will run it up again and you will end up owing €50k.

If you don't pay off a loan to your brother according to the agreed schedule, you could well fall out with your brother. This is not worth it for some small advantage.

People often believe that they can plan their finances well ahead but then their plans change. Your brother may well need the money sooner than the agreed repayment schedule.

If you do go ahead with it, he will be in receipt of interest, so he must pay income tax and prsi on it as with any other income, not just DIRT.

You must do a written agreement specifying the rate and the payment schedule and what happens if you don't meet the repayments. What if interest rates change? What happens if you die? What happens if he dies?

Borrowing €25,000 and paying €1,000 interest up front, is the same as borrowing €24,000.

For simplicity of calculation, it might be no harm to calculate the interest at the start of each year rather than every month or every day. A flat rate of 4% pushes up the APR a bit, but it's not that significant and you can adjust the flat rate if that is a concern.

If you are in a position to make a capital repayment, then you can adjust the interest charge mid -year.

 

[nbc]

.

Thanks Brendan
1) Myself and my brother own an apartment for 8 years. We get on well and there's complete trust. A formal agreement would be drawn up.
2) One of the credit cards is from halifax(10000). I have paid off 1000 and as this card is no longer functunal I cant run up any more debt on it. Regarding the other I had exceptional expenses in the last year incl doing a 1 yr post graduate diploma. I propose to reduce the limit from 15K to 10K so thta should reduce concerns re puting up another 25K.
3) What sort of effective return would he be getting if we forget about tax concerns for the moment based on the proposition I outlined?
4) Any tax issues for me receiving a loan from my brother?
5) Does this make sense for me from a financial pt of view?
nbc

 

[Brendan Burgess]

Hi NBC

1) Is the apartment in positive equity? If so, then you should give him a letter giving him an increase in the percentage ownership of the property if you don't pay off the credit card debt.

Are you living in the apartment or is it an investment? You don't want to fall out with him if you are living in it.

I am sorry for being so boring about this, but I have seen family members "who had complete trust" falling out with each other over money. I have seen other family members getting involved saying - "Sure he has plenty of money, why doesn't he let his brother off the debt?"

2) You are still proposing to have a limit of €10k though? You should reduce your limit to €1k and make sure you pay it off in full every month.

The one year post-grad is a valid reason for running up such credit card bills, but it would have been better to finance it differently.
3) If he can get 3% at the moment, that is roughly 2% after dirt.
I think that 4% gives him the same return after income tax.. But you are paying 10%. I would have thought that a fair solution would have been 7%.

4) No tax issues for the amounts involved. but he must pay tax on the interest received.

5) It makes a lot of sense to you to pay 4% instead of 10% as long as you don't run up the same amount of debt again.

Additional point
If you get into financial difficulties in the future, you might be able to do a deal with Halifax to write off the balance. You could not do that with your brother.

Brendan

 

[nbc]

.

Thanks Brendan,
All very sound solid advice. Good idea about the apt. Yes its an investment property and there is probably 40K equity assuming a 40% price drop.
Is there anyway to avoid him paying income tax on it?(apart from me giving him cash). I would like to keep things legal. For example can he lend me the money as a favour and I pay it back to him and give him a gift of a 1000 anually for being decent or would revenue consider this 'interest' in a formal sense.
NBC