How to Ask for a Loan From Family: Promissory Notes and IRS Rates

The cleanest way to ask for a loan from family is to arrive with the numbers already worked out: the exact amount, a written repayment schedule, an interest rate that meets the IRS minimum, and a promissory note ready to sign. Treat the conversation like a business meeting, not a favor request. That posture is what separates a yes from a no, and it’s also what keeps the arrangement from turning into a taxable gift down the road.

Know Your Number Before You Say a Word

Walk in with an exact figure. “I need about $30,000 for some bills” costs you credibility before the conversation starts. “I need $28,400 to consolidate two credit cards at 24% interest, and here is my payoff plan” earns a serious hearing. Calculate to the dollar and be ready to explain why this amount rather than a round one.

Then build the repayment schedule. Map every payment from first to last with specific dates and amounts. Include the interest rate you are proposing, how often interest compounds, and the total cost of the loan over its life. If you can offer a shorter term or early payoff without penalty, put that on the table. Lenders like flexibility that favors them.

Put It in a Promissory Note

A promissory note is a signed written promise to repay a specific sum on defined terms. It should include the full legal names of both parties, the principal, the interest rate, the payment schedule, and what happens if you miss a payment. Late fees and default terms are not hostile. They show the lender you take accountability seriously, and they are also what the IRS looks for when deciding whether a transfer between relatives was really a loan.

Templates exist through online legal services. For larger loans, having an attorney draft or review the note is worth the cost. Both parties should sign, and notarizing the signatures adds authentication that matters if the IRS later questions whether the loan was real. Notary fees for standard document signing run roughly $2 to $25 per signature depending on the state, with remote online notarization typically higher.

How to Present the Proposal

Ask for a specific time to talk. Not a casual aside at a family dinner. Pick a private, quiet setting and bring the completed promissory note and repayment schedule as printed or digital documents. Having everything ready before the meeting signals that you have done your homework and are not asking on impulse.

Walk through the terms clearly, then stop talking. Let the family member read, think, and ask questions. Offer to leave the documents so they can review at their own pace or consult a financial advisor. Pressuring someone into an immediate answer is the fastest way to get a no, or a resentful yes that poisons the relationship later.

If they agree, sign the note and move the money through a traceable channel. A bank wire or direct deposit, not a check handed over at Thanksgiving. Cash leaves no paper trail, and an IRS auditor will not take your word for what happened.

Charge at Least the IRS Minimum Interest Rate

This is the piece most people miss, and it is the piece that turns a friendly loan into a tax problem. The IRS publishes an Applicable Federal Rate, or AFR, every month. If you charge interest below the AFR, the IRS treats the difference as a gift from the lender to the borrower, and simultaneously treats that same amount as interest income the lender must report even though no cash ever changed hands.¹ This phantom income is called imputed interest.

The rate you propose depends on how long the borrower has to repay:

Short-term, 3 years or less: 3.59% annual rate as of March 2026
Mid-term, over 3 years but not more than 9: 3.93%
Long-term, over 9 years: 4.72%

These rates come from the IRS’s monthly revenue rulings and reflect yields on U.S. Treasury obligations.² The term breakpoints are set by statute.³ You lock in the rate from the month the loan is made, so check the current month’s ruling before signing.

The lender reports all interest received, or imputed, as ordinary income on their annual return. Failing to report it can lead to an accuracy-related penalty of 20% of the underpaid tax.⁴ If the forgone interest exceeds the 2026 annual gift tax exclusion of $19,000 per recipient, the lender also has to file Form 709.⁵ Filing does not necessarily mean owing tax, since the excess counts against the lender’s lifetime exemption, but skipping the form when it is required is a compliance problem the lender does not need.⁶

Smaller Loans That Get a Pass

Federal law carves out two exceptions based on loan size, and they matter if you are asking for a modest amount.

If the total outstanding balance between the two of you stays at or below $10,000, the below-market interest rules do not apply at all. A relative can lend you $10,000 interest-free without imputed interest or gift tax consequences.¹ The exception vanishes if you use the money to buy or carry income-producing assets like stocks or rental property. In that case, the full AFR rules apply regardless of loan size.

For gift loans where the balance stays at or below $100,000, the imputed interest the lender must report is capped at the borrower’s net investment income for the year. If the borrower earned less than $1,000 in net investment income, the imputed amount is treated as zero, which effectively makes the loan interest-free from a tax perspective.¹ Once the balance crosses $100,000, the cap disappears. The exception also does not protect loans structured primarily to avoid federal tax.

Track Every Payment After the Money Moves

Once the funds have transferred, keep a ledger of every payment: date, amount, how much went to principal, how much to interest, and the remaining balance. Send the lender a written confirmation after each payment, whether that is an email or a shared spreadsheet. Use traceable payment methods.

These records do double duty. For you, they prove the loan is being repaid as agreed, which is critical if the IRS ever questions whether the transfer was really a loan or a gift. For the lender, they support the interest income reported on tax returns. Regular updates on the remaining balance also keep the professional tone of the arrangement intact, which quietly erodes when payments arrive without acknowledgment and balances become a guessing game.

What Happens If Payments Stop or the Loan Is Forgiven

If the family member later forgives part or all of the loan, the canceled amount is generally taxable income to you as the borrower, because the IRS treats cancellation of debt as income in the year the forgiveness occurs.⁷ There is an exception when the lender genuinely intends the forgiveness as a gift, in which case it falls under the gift rules and is not taxable income to you. Individual family lenders are generally not required to file Form 1099-C when they cancel a debt, since that requirement applies to entities in the business of lending.⁸ The reporting obligation still exists for you if the forgiven amount is income.

If you stop paying entirely and the debt becomes worthless, the lender may be able to claim a nonbusiness bad debt deduction, but only by proving the original transfer was a loan rather than a gift, that the debt is totally worthless, and that they took reasonable steps to collect.⁹ This is where the promissory note, the notarized signatures, and the ledger of payments earn their keep. Without those, convincing the IRS that a cash handoff at Thanksgiving was ever a real loan is nearly impossible.

1
Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
2
Internal Revenue Service. Rev. Rul. 2026-6 Applicable Federal Rates for March 2026
3
Office of the Law Revision Counsel. 26 USC 1274 – Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property
4
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
5
Internal Revenue Service. Instructions for Form 709 (2025)
6
Internal Revenue Service. What’s New — Estate and Gift Tax
7
Internal Revenue Service. Topic No. 431, Canceled Debt — Is It Taxable or Not?
8
Internal Revenue Service. Instructions for Forms 1099-A and 1099-C
9
Internal Revenue Service. Topic No. 453, Bad Debt Deduction