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How to lend money to family legally

Lending to family is legal, and for most small loans the paperwork is simple. Five steps keep it clear for both of you and for the IRS: decide loan or gift, write it down, pick a rate, record every payment, and know what you'll do if payments stop.

Checked 2026-09-28 · All guides

This is general information, not legal or tax advice. The paperwork rules are the same in outline everywhere: a note signed by the borrower is enough, with no notary or witness, and a few states add rules for long or large loans (step 2 below). States also cap the interest a private lender may charge, but at the IRS minimum rate you are under every state cap we found (interest caps by state). If the loan is large, or secured by a house, car or other property, a lawyer can draft or review it: securing a loan means filing or recording steps the note alone doesn't cover.

Is it legal to loan money to a family member?

Yes. There's no IRS form for a family loan itself and nothing to register. Tax paperwork only comes in if the loan pays you interest (you report it) or if a gift over $19,000 is involved (Form 709). What makes a family loan "done properly" is mostly evidence: a clear agreement and a record of what was paid.

The lender's checklist

Decide: loan or gift? Say it out loud before any money moves. The IRS asks whether you meant it as a loan when the money changed hands: money lent to a relative "with the understanding" it may not be repaid counts as a gift (IRS Topic 453). If you'd be fine never seeing it again, a gift may be the more honest choice. How to tell loan from gift.
Put it in writing. Both names, the amount, the rate, the payment dates, and what happens if a payment is missed. Both of you sign and keep a copy. Use the free loan agreement tool, or see what every agreement needs and a promissory note template. No state we checked requires a notary or witness for an unsecured personal loan note or IOU; what's required is a writing signed by the borrower (UCC §3-103). Notarizing is optional, but it makes the signature easier to prove in court (Federal Rule of Evidence 902(8)). Most states require a loan repaid over more than a year to be in writing (Mississippi: over fifteen months; North Carolina, Louisiana, New Jersey and Pennsylvania have no one-year rule). Connecticut also wants any loan over $50,000 in writing, Virginia any promise to lend $25,000 or more, South Dakota any loan agreement, and Alabama any agreement to lend money except consumer loans under $25,000 (whether a family loan counts as a consumer loan there is unsettled). The rules in more detail.
Set an interest rate, or know what 0% means. Families don't have to charge interest. But on larger loans, charging less than the IRS minimum rate (below) brings in extra tax rules. Details: choosing a family loan rate and interest-free loans and tax.
Keep records of every payment. Have them pay by bank transfer, not cash, and keep a simple log: date, amount, balance left. A written agreement, a schedule, payments actually made, and records of asking about missed ones are the kind of evidence that helps show a real loan. (That's good practice, not an official IRS checklist.)
Know what you'll do if they don't repay. Decide now whether you'd remind, give more time, or forgive part of it. What to do when someone owes you money, and reminder scripts you can send yourself.

The IRS minimum rates for October 2026

Each month the IRS publishes "applicable federal rates" (AFRs). The length of the loan picks the rate, and for a loan with a set end date, the rate for the month you make the loan stays fixed for its whole life.

Loan length	Annual	Monthly
3 years or less (short-term)	4.25%	4.17%
Over 3, up to 9 years (mid-term)	4.61%	4.52%
Over 9 years (long-term)	5.22%	5.10%

Source: IRS Revenue Ruling 2026-19, Table 1, October 2026. The two columns are the same rate for different compounding: use the annual figure if interest is added once a year, the monthly figure if the borrower pays monthly. Rates change every month. Checked 2026-09-27.

State interest caps for private lenders

Most states limit the interest a lender may charge on a personal loan (their "usury" laws), and the limit can apply to a parent or sibling lending once, not just to banks. The key point: the October 2026 IRS minimum rates (4.25%, 4.61% and 5.22%) are below every state cap we read on official state sites. Even the long-term rate, 5.22%, is 0.78 points under the lowest cap. Charging the IRS minimum keeps a family loan inside both the tax rules and state interest law.

The lowest caps, where charging well above the IRS minimum could cross the line:

State	Cap on a personal loan by written agreement
Pennsylvania	6%, on loans of $50,000 or less ($35,000 if unsecured)
Iowa	6.75% for October 2026 (reset every month at 2 points above the 10-year Treasury average)
Michigan	7%
North Dakota	A monthly formula, never below 7%, on loans of $35,000 or less
Alabama, Minnesota, Ohio, West Virginia	8% (Alabama: loans under $2,000; Minnesota: under $100,000; Ohio: $100,000 or less)
Maryland	8% with a signed agreement stating the rate (unsecured loans can go to 18% or 24% under set conditions)

Other caps run higher: Illinois 9%, California 10% for personal loans, New York 16%. Arizona, Nevada and Utah set no cap on a rate agreed in writing. Many caps stop at a loan size (the Alabama, Pennsylvania, North Dakota, Minnesota and Ohio limits above); above that size, any agreed rate is lawful.

A one-off family loan often gets a wider limit. In Colorado, Indiana, Oklahoma and South Carolina, the consumer-credit rate limits cover only lenders "regularly engaged" in making loans. A parent lending once falls under the general rule instead: up to 45% in Colorado and Oklahoma, 25% in Indiana (for smaller personal loans), and any agreed rate in South Carolina.

What happens to a loan over the cap. It depends on the state, and the loss falls on the lender. Examples from the state codes:

Michigan: the lender can't recover any interest, fees or court costs.
Iowa: the lender gets a judgment for the unpaid principal only, with no interest or costs, and forfeits 8% a year on the unpaid principal to the state.
Pennsylvania: the borrower need not pay the excess interest and can recover three times any excess already paid.
West Virginia: the loan is void as to all interest, and the borrower can also recover four times the interest agreed.
North Dakota: the lender forfeits all interest plus 25% of the principal.
Minnesota and New York: the usurious loan contract is void.

So the risk runs one way. A family loan at the IRS minimum is under the cap everywhere we checked; the same loan at 10% or 12% would be over it in Pennsylvania, Iowa, Michigan, Minnesota, Ohio and West Virginia (within their loan-size limits). The sources below link each state's code section.

Caps read on each state's official code site or banking agency, 2026-09-28. Iowa's cap changes monthly. This covers ordinary personal loans; loans secured by real estate, and licensed lenders, often follow separate rules.

How much money can you loan a family member?

The figures that matter for tax:

$10,000. For a gift loan directly between two people, the below-market loan rules don't apply on any day the total owed between them is $10,000 or less (26 U.S.C. § 7872). So a 0% loan of up to $10,000 is simple, unless the money buys things that earn income, like stocks or a rental. A married couple counts as one person, so two parents lending to one child share one $10,000 limit.
Over $10,000 at below the AFR. The tax law treats the missing interest as if you'd charged it: it can count as interest income to you and as a gift to the borrower. There are limits for family loans up to $100,000; here's how it works, with dollars.
$19,000. In 2026 you can give up to $19,000 to any one person without filing a gift tax return (the annual exclusion). A married couple can give one person $38,000 between them, but splitting one spouse's gift means filing.

When is Form 709 needed?

Generally when your gifts to one person (other than your spouse) total more than $19,000 in the year. That includes forgiving a loan: the amount you forgive is a gift in the year you forgive it. A 2026 gift's return is due April 15, 2027. Filing doesn't usually mean paying: gift tax is owed only after your lifetime amount ($15,000,000 in 2026) is used up. Forgiving $12,000 of a child's loan in 2026, with no other gifts to them, is under $19,000, so no Form 709.

Forgiveness planned from the start is treated differently. If the plan when the money moved was never to collect (for example, the lender told the borrower each year's payment would be forgiven), the IRS treats the whole loan as a gift on the day the money changed hands, not as a series of yearly gifts (Rev. Rul. 77-299, 1977). Two older Tax Court cases went the other way (Haygood, 1964; Kelley, 1974), but the IRS said it won't follow them, and a federal appeals court (Estate of Maxwell, 2d Cir. 1993) held that a note nobody intended to be paid had "no value at all". Which side a loan falls on depends on the facts: what was agreed when the money moved, whether the borrower could pay, and whether payments were ever expected. Example: a $57,000 loan forgiven at $19,000 a year, with the forgiveness planned from the start, is a $57,000 gift in the loan year. That's $38,000 over the annual exclusion, so a Form 709 is due, and $38,000 of the $15,000,000 lifetime amount is used. No tax is owed unless the lifetime amount runs out.

Borrowing money from a family member: tax implications

Interest you receive is taxable income. Report it on your return even though no Form 1099-INT arrives; a family borrower isn't required to send one (IRS Topic 403; Form 1099-INT instructions). Over $1,500 of interest in a year, you also file Schedule B.
The borrower generally can't deduct interest on a personal loan. For a home purchase, the interest is deductible as mortgage interest only if the loan is a "secured debt": the borrower signs a mortgage or deed of trust on the home, it's recorded with the county under state law, the money bought, built or substantially improved that home, and the borrower itemizes deductions. A note that isn't recorded, even one that says "secured", doesn't qualify (IRS Publication 936, "Secured Debt"; 26 CFR §1.163-10T(o)). The county recorder's office handles the recording.
If it's never repaid, a real loan that becomes totally worthless can be a capital loss for you. A gift can't. Details here.

Plan the repayments

Until the schedule builder is ready, here's one worked by hand.

A worked example: $10,000 over 3 years at 4.25%

In October 2026 you lend your brother $10,000 to repay over 36 months. That's 3 years, so the short-term rate applies. You agree 4.25% a year, paid monthly. That's at or above the minimum: paid monthly, the AFR is 4.17%.

Monthly rate: 4.25% ÷ 12 = 0.354% (0.0035417).
Monthly payment: $10,000 × 0.0035417 ÷ (1 − 1.0035417⁻³⁶) = $296.35.
Total repaid: $296.35 × 36 = $10,668.60, so about $669 in interest over three years (the last payment is $296.46 to absorb rounding; interest $668.71).

Payment	Interest	Toward loan	Still owed
1 (Nov 2026)	$35.42	$260.93	$9,739.07
2 (Dec 2026)	$34.49	$261.86	$9,477.21
12 (Oct 2027)	$25.07	$271.28	$6,807.08
36 (Oct 2029)	$1.05	$295.41	$0.00

Payment 1's interest is $10,000 × 0.0035417 = $35.42; the rest of the $296.35 pays down the loan. For 2026 you'd report the interest actually received in November and December: $35.42 + $34.49 = $69.91.

What if you'd charged 0%? At exactly $10,000 the total owed never goes over $10,000, so the below-market rules wouldn't apply (unless the money bought income-producing assets). Your brother would pay $277.78 a month ($10,000 ÷ 36) and you'd have no interest to report.

Free tax help

If you have tax questions about a family loan, IRS Volunteer Income Tax Assistance (VITA) prepares returns free for people who qualify, and Low Income Taxpayer Clinics help with IRS problems. For a large loan, or one tied to a home, a lawyer or tax professional can review the paperwork.

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.