What Is the Minimum Interest Rate for a Family Loan?

The minimum interest rate for a family loan is the applicable federal rate (AFR) that the IRS publishes for the month you make the loan. For March 2026, the AFRs with annual compounding run from 3.59% on short-term loans up to 4.72% on long-term loans.¹ Charge less than the AFR, or no interest at all, and the IRS treats the missing interest as income you should have collected and as a gift back to your relative.²

The Three Rate Tiers

The AFR you need depends on how long the borrower has to repay. The tax code sorts loans into three brackets:³

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

For March 2026, those rates with annual compounding are 3.59%, 3.93%, and 4.72% respectively.¹ The maturity date in your written loan agreement is what sorts the loan into a tier. A five-year loan uses the mid-term rate. A thirty-year loan uses the long-term rate.

A term loan locks in its AFR on the day it is signed, and that rate stays put for the life of the loan no matter what rates do later. A demand loan, one the lender can call at any time, is different: it always uses the short-term AFR, and that rate floats, so the required rate is recalculated each period against whatever the current short-term AFR happens to be.²

Finding the Exact Rate for Your Month

Rates change every month. To pin down yours, you need the loan’s term (which sets the tier), the month the note is signed, and a compounding frequency. The IRS publishes rates for annual, semiannual, quarterly, and monthly compounding, and more frequent compounding produces a slightly lower stated rate for the same effective yield.

Each month’s figures come out in a new revenue ruling. The full archive sits on the IRS Applicable Federal Rates page, with rulings going back to January 2000.⁴ Open the ruling for your loan’s month, find your tier, and read across to your compounding column. A seven-year family loan signed in March 2026 with annual compounding needs at least 3.93%. A fifteen-year loan the same month needs at least 4.72%.¹

What Happens If You Charge Less

Federal law calls a loan that charges below the AFR a “below-market loan,” and it attaches two tax consequences.² The gap between what you charged and what you should have charged is called imputed interest. First, you owe income tax on it, as though you had collected it. Second, the IRS treats the same gap as a gift from you to the borrower.⁵

The gift side only becomes a filing problem above the annual exclusion. For 2026, you can give any one person up to $19,000 without filing anything.⁶ If the imputed interest plus any other gifts to the same borrower that year goes over $19,000, you must file Form 709.⁷ Filing is not the same as owing. The excess counts against your lifetime gift and estate tax exemption, which for 2026 is $15,000,000 per person.⁸ Actual gift tax, at 40%, only kicks in after you have burned through that entire lifetime amount.

Loans Small Enough to Ignore the AFR

Two exceptions in the tax code let smaller family loans skip the AFR calculation.²

The first is the $10,000 rule. If the total outstanding balance between you and your relative never exceeds $10,000 on any day, the below-market loan rules do not apply, and you can charge zero interest without creating imputed interest or gift tax issues. This exception does not apply if the borrower uses the money to buy income-producing assets like stocks or rental property.

The second is the $100,000 rule, which applies to gift loans between individuals. If the outstanding balance stays at or below $100,000, the imputed interest you must report as income is capped at the borrower’s net investment income for the year. If their net investment income is $1,000 or less, the IRS treats it as zero, meaning no imputed interest at all. That wipes out the tax bite for many mid-size family loans where the borrower has little investment income. The exception vanishes if tax avoidance is a principal purpose of the loan.

Put the Loan in Writing

A written promissory note is what separates a loan from a gift in the eyes of the IRS. Without one, the agency can recharacterize the whole transfer as a taxable gift from day one. The note should set out:

The full legal names of lender and borrower
The principal amount
The interest rate, at or above the AFR for your tier and month
A specific repayment schedule with due dates
Whether each payment is interest-only or includes principal

Both parties sign. Notarization adds authenticity but is not legally required in most situations. Make every payment through a bank transfer or check so there is a record. Cash is hard to prove in an audit. A consistent paper trail is what demonstrates a real debtor-creditor relationship and keeps the IRS from recasting the arrangement as an informal gift or an advance on an inheritance.

If You Forgive the Loan or the Borrower Defaults

Forgiving part or all of a family loan is treated as a gift of the forgiven amount from lender to borrower.⁷ If what you forgive, combined with your other gifts to that person for the year, exceeds $19,000, you file Form 709.⁶ The borrower owes no income tax on debt that is forgiven as a gift.⁹

If the borrower stops paying and the debt is genuinely uncollectible, you may be able to claim a nonbusiness bad debt deduction, which the IRS treats as a short-term capital loss reported on Form 8949. You have to show two things: that there was a real loan rather than a gift, and that you made reasonable efforts to collect. A court judgment is not required, but you do need to show the debt is worthless. Attach a statement to your return giving the amount, the date it was due, your relationship to the borrower, what collection steps you took, and why you concluded the debt was uncollectible.¹⁰

1
Internal Revenue Service. Rev. Rul. 2026-6 – Applicable Federal Rates for March 2026
2
Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
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
Internal Revenue Service. Applicable Federal Rates (AFRs) Rulings
5
Internal Revenue Service. Gift Tax
6
Internal Revenue Service. Frequently Asked Questions on Gift Taxes
7
Internal Revenue Service. Instructions for Form 709
8
Internal Revenue Service. What’s New – Estate and Gift Tax
9
Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not?
10
Internal Revenue Service. Topic No. 453, Bad Debt Deduction