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What interest rate should you charge on a family loan?

There's no rate you're required to charge, but the IRS publishes a minimum each month, called the applicable federal rate. Charge at least that and the special tax rules for low-interest loans don't apply. Here's October 2026's, and what the difference is in dollars.

Checked 2026-09-28 · All guides

General information, not tax advice. Rates checked on IRS.gov, 2026-09-27. They change every month.

Current family loan interest rate: October 2026

Each month the IRS publishes minimum rates called applicable federal rates (AFRs). There are three, and the length of the loan picks which one you look at.

Loan length	Which rate	October 2026	September 2026
3 years or less	Short-term	4.25%	4.18%
Over 3 years, up to 9	Mid-term	4.61%	4.49%
Over 9 years	Long-term	5.22%	5.12%

Annual-compounding figures from IRS Revenue Ruling 2026-19 (October) and 2026-17 (September). The same ruling lists each rate for other compounding periods; if the borrower pays monthly, the monthly figures are 4.17% (short), 4.52% (mid) and 5.10% (long). They're the same rate, just counted monthly. The ruling also lists higher multiples (110% and up) and a "section 7520" rate; those aren't the family-loan minimum.

Is the IRS minimum ever too high for state law? No. Every state interest cap we read on official state sites is at least 6% (Pennsylvania, on loans of $50,000 or less; Iowa's is 6.75% for October 2026), above even the 5.22% long-term rate. A rate at or near the AFR is below every state cap. Caps by state, and what happens to a loan over one, are on how to lend money to family legally.

Where to look it up each month

Go to the IRS applicable federal rates page. It lists a revenue ruling for each month. (It can lag: September 2026's ruling was on IRS.gov but not yet on the list when we checked.)
Open the ruling for the month the loan is made and find Table 1.
Pick the row for the loan's length, and the column that matches how often interest is added (annual if once a year, monthly if the borrower pays monthly).

Which month's rate: a loan with an end date, or "pay me back whenever I ask"

A term loan (a set end date) uses the rate for the month the loan is made. It's locked in for the life of the loan. An $8,000 loan made in October 2026 over 2 years uses 4.25% from now until it's repaid, even if rates move.
A demand loan (payable in full whenever the lender asks) floats: the tax rules use each period's short-term rate, as it changes.

The 2026 "blended annual rate": 3.82%. The IRS publishes this once a year with the July rates (Rev. Rul. 2026-12, Table 6). It's a shortcut for one kind of loan only: a demand loan whose balance stayed the same for the whole calendar year, January 1 to December 31. The IRS created it in Rev. Rul. 86-17 for "a below-market demand loan of a fixed principal amount that remains outstanding for the entire calendar year", and its 1985 proposed regulation (§1.7872-13) uses the same heading. For that loan, the interest the tax law assumes for 2026 is the balance times 3.82%, minus any interest actually charged.

Example: $50,000 lent interest-free, repayable on demand, outstanding with no change all of 2026. The assumed interest is $50,000 × 3.82% = $1,910, treated as passing on December 31, 2026. The $100,000 rule below still applies on top: the lender's taxable amount is capped at the borrower's investment income for the year, and it's zero if that income is $1,000 or less. On the gift side, the $1,910 counts toward the $19,000 annual exclusion for that borrower.
When the shortcut doesn't apply: the loan started or was repaid partway through the year, the balance changed (each increase counts as a new loan, each decrease as a repayment), or the loan has a fixed end date. A demand loan made on April 1, 2026, for example, is worked out period by period at the short-term rate in force for each half of the year. A term gift loan uses, for income tax, the rate in force on the day it was made.

What is the minimum interest rate for a family loan?

There isn't one you're required to charge. The IRS doesn't say families must charge interest. The tax law (section 7872) only says what happens if the rate is below the AFR. A written rate at or above the AFR for the month and term means the loan isn't "below-market", so those rules don't apply to it.

What happens if you charge less, or 0%?

A lower rate, including 0%, is allowed. It brings in two tax effects:

Imputed interest. The tax law treats the lender as if they'd charged the AFR, so the lender may owe income tax on interest they never received.
A possible gift. The missing interest can count as a gift from the lender to the borrower.

Two exceptions cover most small family loans:

$10,000. For a gift loan directly between two people, the rules don't apply on any day the total of all loans between them is $10,000 or less, unless the money goes to buy or hold income-producing assets (such as stocks, bonds or rental property). A married couple counts as one person, so two parents lending to one child share one $10,000 limit.
$100,000 (income tax only). For gift loans directly between two people totalling $100,000 or less, the lender's imputed interest is capped at the borrower's investment income for the year (for example bank interest and dividends), and it's zero if that income is $1,000 or less. This doesn't apply if avoiding tax is one of the main purposes. The missing interest can still count as a gift.

The detail, with dollars, is on interest-free family loans and taxes.

When a loan with an end date falls back to $10,000 or less. The $10,000 exception covers demand and term gift loans alike, on any day the total owed is $10,000 or less. If a term loan was once over $10,000, the two taxes then part ways:

Gift tax: the gift was measured once, on the day the loan was made. It stays counted when the balance drops (26 U.S.C. §7872(f)(10) keeps the rules running for a term loan, but for gift loans only "for purposes of chapter 12", the gift tax).
Income tax: the exception comes back. On days the total owed is $10,000 or less, no interest is imputed. The IRS's 1985 proposed regulation says the same: for a gift term loan the carry-on rule "applies only for gift tax purposes and does not apply for income tax purposes" (Prop. Reg. §1.7872-7(b)(2)).

IRS Publication 550 says the $10,000 exception "does not apply to term loans" and that the rules continue after the balance falls. That matches the statute for employer and company loans. For family (gift) loans the statute is narrower, and where a publication and the Internal Revenue Code differ, the Code is the law.

Worked examples: the AFR vs 0%

How the monthly payment is worked out, in plain words: take the yearly rate and divide by 12 to get the monthly rate. The payment is the loan amount times the monthly rate, divided by (1 minus (1 + monthly rate) raised to the power of minus the number of months). Each payment covers that month's interest first; the rest pays down the loan.

Example 1: $8,000 over 2 years (short-term rate). Monthly payments, made in October 2026, so we used the short-term monthly figure, 4.17% (the same as 4.25% a year).

	At the AFR (4.17% monthly)	At 0%
Monthly payment, 24 months	$348.01	$333.33
Total interest	about $352	$0
Interest in the first 12 payments	about $259	$0

At 0%, the borrower pays about $352 less over two years. Because it's under $10,000, the imputed-interest rules don't apply, as long as there are no other loans between the two of them pushing the total over $10,000 and the money isn't used to buy income-producing assets. (If you write "4.25%" in the agreement and charge it monthly, the payment is $348.29 and interest about $359; that's slightly above the minimum, which is also fine.)

Example 2: $30,000 over 5 years (mid-term rate). Over 3 years, so the mid-term rate applies. Monthly payments, so we used the mid-term monthly figure, 4.52% (the same as 4.61% a year).

	At the AFR (4.52% monthly)	At 0%
Monthly payment, 60 months	$559.56	$500.00
Total interest	about $3,574	$0
Interest in the first 12 payments	about $1,244	$0

At 0%, this loan is over $10,000, so the below-market rules can apply. For income tax, it's under $100,000, so the lender's imputed interest is capped at the borrower's investment income for the year (zero if that's $1,000 or less). At $500 a month the balance reaches $10,000 with the 40th payment; from then on, no interest is imputed for income tax. For gift tax, a term gift loan is measured once, on the day it's made: the amount lent minus today's value of the payments, discounted at the AFR. Our arithmetic for this example, using the mid-term semiannual rate of 4.56%, is a gift of about $3,190, which is below the $19,000 annual gift exclusion for 2026 if nothing else is given to that person that year. (Written "4.61%" charged monthly instead: $560.79 a month, about $3,647 in interest.)

Examples, rounded to the dollar where marked "about". Your own dates and payments change the figures.

Is the interest taxable?

Yes, for the lender. Interest received is income and goes on the lender's tax return, even with no Form 1099-INT. A family borrower doesn't send the lender a 1099-INT. Over $1,500 of taxable interest or ordinary dividends in a year means filing Schedule B. On the other side, interest on a personal family loan generally isn't deductible for the borrower.

What's a fair interest rate for a family loan?

That's the family's choice. Most land somewhere between 0% and what the borrower would otherwise pay a bank or card. The AFR is the point where the tax side stays simple. Whatever you pick, write it down with the payment dates: a family loan agreement does that, and how to lend money to family legally covers the rest. If part of it is really a gift, read loan or gift? first.

Free help

For questions about your own loan, IRS Volunteer Income Tax Assistance (VITA) sites and Low Income Taxpayer Clinics give free help if you qualify. Links are in the sources below.

Sources

Sources checked 2026-09-28.

General information, not legal or financial advice. You send every message yourself; we never contact anyone on your behalf.