Crown loans are demand loans extended by one individual to a relative or other loved one, with terms that are generally much more liberal than other loan situations. Unlike loans obtained from institutions or commercial lenders, this type of loan normally does not have any type of payoff or maturity date as part of the terms, and may not require payment of any interest along with repayment of the principal. Like other types of demand loans, crown loans can be called at any time the lender chooses to exercise that option.
One of the most common reasons for the extension of this type of demand loan is the desire of a high-income individual to assist a friend or relative who is currently experiencing financial difficulties. The repayment terms of the loan are often open-ended, meaning there is no set amount that must be repaid each month, or even a final date that the debtor must pay off the amount borrowed. There may be an agreement between the two parties that repayment is not expected to commence until the debtor is back on his or her financial feet and can afford to pay off the balance in increments.
Parents sometimes extend crown loans to children as a means of assisting them to make some type of major purchase. For example, if an adult child is purchasing a first home and needs help with the down payment, the parents may provide the funding. The loan may be extended with the understanding that the loan must be repaid over time, or that the balance of the loan will be subtracted from that child’s share of the parents’ estate. This type of financial assistance, often referred to as the extension of love money, can often help the first time homebuyer obtain more favorable mortgage terms, since the larger down payment reduces the amount of risk that the mortgage lender is assuming.
It is important to note that crown loans are not gifts. Gifts are funds received that are not subject to repayment at some time in the future. The giver relinquishes all claims on the funds and considers the transaction complete. In contrast, the lender in a crown loan does expect to be repaid in some fashion in the future. Distinguishing between the two is not only important to maintaining cordial personal relationships between the two parties, but also to the question of whether taxes are assessed and owed to local and national tax agencies. Depending on the tax laws currently in force in the area where the two parties reside, crown loans as well as cash gifts may be subject to some type of taxation.
