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Church Loan to Pastor - What Terms Can We Charge

I'm the treasurer for a church and we just decided to make a housing loan to a new pastor. Is there a minimum rate or index to follow as far as the interest that we charge? We do not want this to be considered a gift or salary, but just a loan to be repaid upon sale of the home or job dismissal.


Interest rates and terms are defined by state law in most cases. As a church and an entity that doesn't make loans on a regular basis you are likely defined as a "unregulated lender." This means you can do what you want, up to a point. It may be that you can't exceed a given rate, 10% as an example, without following certain rules.

I would urge you to consult an attorney who is competent in real estate law in your state. I say this for various reasons including their knowledge of rate and fee limitations which may be triggered, but you also want the loan to be due in full if employment is terminated. That is not a usual clause and will require some special wording, and timing requirements if he leaves by his choice or your's. You also want counsel who can address escrow account issues, required disclsoures, the requirement that you provide statements on a periodic basis, how you properly amortize the debt, report interest paid to the IRS and all those things that go along with being a lender. You must think about the loan and repayment period and terms as you consider what will be involved for the life of the loan. I would certainly recommend discussing this with a CPA as well to determine what happens as payments are made and if they're not, how you track and report the income, etc.

Published on BankingQuestions.com 10/05/06