We have a member that has an emergency and needs $700. Can the church make a loan to this individual with no interest for 6-8 months?
No law prevents your church from meeting the emergency needs of a member. However, lending money to the member creates costs and risks to the church. In most cases, the church is better served giving the money to the member as a benevolent gift. Later, if the member desires, they can contribute some money back so the church can assist others.
The size of the proposed loan is unlikely to cause the church to lose its tax exempt status. But that does not mean that the church should be in the business of loaning money. All assets of the church are pledged to be used exclusively for tax exempt purposes. So the loan must further tax exempt purpose. Generally, the IRS has held that lending money does not further an exempt purpose except micro loans (usually under $250) to help new businesses. Loans to members do not further exempt purposes in most cases.
Assuming a church can legally make a loan to the member, the church must make the loan on commercially reasonable terms. This means the loan must have the same terms and conditions as a loan from a bank or other lender. The member must make a written application and authorize the church to conduct a credit background check. The church then can set terms of the loan based on the credit risk of the applicant and market conditions. If the bank has already turned down the loan, the church should not make the loan. Assuming the church can legally make the loan, the interest rate should equal or exceed the interest rate a bank would charge. The church should also engage an attorney to draft the note agreement to avoid violating any lending laws. As you can see, this is a complicated and expensive process. If the member defaults on the loan, the church must sue the member to collect the loan. Since churches are not experts at the lending business, churches that make loans generally make bad business decisions. I do not suggest that the church make the loan to the member. Instead, the church should give the member a benevolent gift if they really are facing a hardship.
