Current Applicable Federal Rate: Rules, Exceptions & Penalties

The current Applicable Federal Rate for April 2026 is 3.59% for short-term loans, 3.82% for mid-term loans, and 4.62% for long-term loans, all compounded annually.¹ This is the minimum interest rate the IRS requires on most private loans, including intra-family loans and seller-financed sales. Charge less, and the IRS treats the shortfall as income you should have received and, often, a gift you made to the borrower.

April 2026 Rates by Compounding Frequency

The IRS publishes a new Revenue Ruling at the start of every month with rates for four compounding frequencies. Your loan document should state which frequency applies, and the rate you charge has to meet or exceed the AFR in that column.

Short-term AFR, for loans of three years or less:

Annual: 3.59%
Semiannual: 3.56%
Quarterly: 3.54%
Monthly: 3.53%

Mid-term AFR, for loans over three years through nine years:

Annual: 3.82%
Semiannual: 3.78%
Quarterly: 3.76%
Monthly: 3.75%

Long-term AFR, for loans over nine years:

Annual: 4.62%
Semiannual: 4.57%
Quarterly: 4.54%
Monthly: 4.53%

More frequent compounding slightly lowers the stated rate needed to satisfy the AFR, because interest compounds on itself more often. Pick the compounding method before signing the note, match it to the correct column, and put it in writing.

Next month’s rates appear on the IRS Applicable Federal Rates page, which lists every Revenue Ruling by month.²

Which Rate Applies to Your Loan

The category you use depends entirely on the loan’s repayment period, not on which rate you’d prefer.³

Short-term: three years or less.
Mid-term: more than three years, up to nine years.
Long-term: more than nine years.

A five-year family loan is a mid-term loan. Using the short-term rate because it’s lower means the loan doesn’t satisfy the AFR, and the IRS will impute interest at the correct mid-term rate regardless of what your note says.

Term Loans Lock the Rate; Demand Loans Float

A term loan has a fixed maturity date. The AFR is set on the day the loan is made and stays fixed for the life of the loan.⁴ Sign a seven-year note in April 2026 at 3.82%, and that rate satisfies the AFR even if mid-term rates rise to 6% next year.

A demand loan can be called in by the lender at any time. Because there’s no fixed term, you can’t lock in a rate. Demand loans always use the short-term AFR, and the applicable rate resets as the short-term rate changes month to month.⁴ They’re simpler to set up but create moving tax consequences over time.

When You Actually Have to Use the AFR

Loans Between Family Members

The most common trigger is a loan between relatives: a parent funding a down payment, a grandparent backing a business, siblings pooling money for real estate. If the interest rate falls below the AFR, the shortfall is treated as a gift from lender to borrower, and the same amount is treated as interest the lender should have received.⁴

Whether the gift side matters depends on the amount. The annual gift tax exclusion for 2026 is $19,000 per recipient.⁵ Imputed interest that pushes total gifts to one recipient over that number requires filing Form 709, even though no cash changed hands for the imputed portion.

Seller-Financed Property Sales

When a seller carries a note on a property sale, the note must carry adequate stated interest. If the rate is too low, the IRS recharacterizes part of each principal payment as interest income to the seller, turning what looked like capital gain into ordinary income.⁶

Seller-financed sales get a timing break the below-market loan rules don’t offer. The test rate is the lowest AFR during the three-month period ending with the month the binding contract is signed, or the three-month period ending with the month the sale closes, whichever produces the lower rate.⁷ Certain land transfers between related family members get a separate cap of 6% compounded semiannually, regardless of where current AFR rates sit.⁶

Exceptions That May Take You Out of the Rules

The $10,000 De Minimis Exception

Gift loans between individuals totaling $10,000 or less are completely exempt from the below-market loan rules. The threshold applies to the total outstanding balance between two people, not per loan, so two $6,000 loans to the same person push past it. The exception also vanishes if the borrower uses the money to buy or carry income-producing assets like stocks or rental property.⁴

The $100,000 Net Investment Income Cap

For gift loans between individuals where the outstanding balance stays at or below $100,000, imputed interest for income tax purposes is capped at the borrower’s net investment income for the year.⁴ If the borrower has no investment income, the imputed interest for income tax purposes is treated as zero. If their net investment income is $1,000 or less, it rounds to zero as well.

This is a real safe harbor for moderate family loans. A $75,000 interest-free loan to a child whose only income is wages produces no imputed interest income for the lender. Gift tax rules can still apply, but the income side is effectively neutralized.

A Note on the Section 7520 Rate

If you’re setting up a grantor retained annuity trust, charitable remainder trust, or valuing a life estate or remainder interest, the AFR is not the number you want. Those calculations use the Section 7520 rate, which equals 120% of the mid-term AFR rounded to the nearest 0.2%.⁸ The Section 7520 rate for April 2026 is 4.6%, and the IRS publishes it in the same monthly Revenue Rulings as the AFR.

What Goes Wrong If You Ignore the AFR

When a loan comes in below the AFR without proper accounting, the IRS treats the interest that should have been charged as if it actually was. The lender owes income tax on interest never collected and reports it on Schedule B of Form 1040, alongside ordinary interest income.⁹ The borrower may or may not be able to deduct the same amount, depending on how the loan proceeds were used.

If the imputed interest, combined with other gifts to the same person, exceeds $19,000 in 2026, the lender files Form 709 to report the gift.⁵ Filing the form doesn’t necessarily produce a gift tax bill, because the lifetime exemption absorbs most gifts, but skipping the filing is itself a compliance failure. For loans where the borrower actually pays interest, the lender must issue Form 1099-INT if total interest paid for the year is $10 or more.¹⁰

On top of the tax itself, the IRS can add a 20% accuracy-related penalty on any underpayment attributable to negligence or disregard of the rules, rising to 40% for gross valuation misstatements.¹¹ Charging zero interest on a large family loan and reporting nothing is the kind of fact pattern that draws it. The defense is reasonable cause and good faith, which is much easier to show when the loan is documented, the correct AFR is used, and the imputed amounts are reported.

One more thing worth flagging if you already have a loan in place: significantly modifying the terms, including changing the interest rate or extending the maturity date, can be treated as issuing a new loan, which then has to satisfy the AFR in effect at the time of the change rather than the original rate.¹² If rates have risen since you set up the note, an informal accommodation to the borrower can reopen the imputed interest question for both sides.

1
Internal Revenue Service. Rev. Rul. 2026-07 – Applicable Federal Rates for April 2026
2
Internal Revenue Service. Applicable Federal Rates
3
Office of the Law Revision Counsel. 26 U.S.C. 1274 – Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property
4
Office of the Law Revision Counsel. 26 U.S.C. 7872 – Treatment of Loans With Below-Market Interest Rates
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
6
Internal Revenue Service. Publication 537 – Installment Sales
7
eCFR. 26 CFR 1.1274-4 – Test Rate
8
Internal Revenue Service. Section 7520 Interest Rates
9
Internal Revenue Service. Instructions for Schedule B (Form 1040)
10
Internal Revenue Service. About Form 1099-INT, Interest Income
11
Office of the Law Revision Counsel. 26 U.S.C. 6662 – Imposition of Accuracy-Related Penalty on Underpayments
12
eCFR. 26 CFR 1.1001-3 – Modifications of Debt Instruments