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 each month. For March 2026, the AFR runs from 3.59% on short-term loans up to 4.72% on long-term loans when interest compounds annually.¹ Charge less than that, or nothing at all, and the IRS treats the missing interest as a gift from you to the borrower, with tax consequences that follow.²

Why the AFR Is the Floor

Federal law calls any loan that charges less than the AFR a “below-market loan” and imposes tax consequences on both sides of the transaction. The IRS calculates the difference between what you charged and what you should have charged at the AFR. That gap is “imputed interest.” You owe income tax on the imputed interest even though you never actually received it, because the law treats the uncharged interest as if the borrower paid it to you and you then gifted it back.³

The rates are grounded in the tax code’s rules for pricing debt instruments,⁴ and the IRS refreshes them monthly through a revenue ruling tied to current Treasury yields.⁵

The Three Rate Tiers

Which AFR applies depends on how long the borrower has to pay you back:⁴

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

The maturity date written into your loan agreement decides the tier. For March 2026, the annual-compounding AFRs are 3.59% short-term, 3.93% mid-term, and 4.72% long-term.¹ Shorter loans carry lower minimums because the lender is exposed for less time; longer loans require a higher floor to reflect the added uncertainty.

Term Loans

A term loan has a fixed repayment date. The AFR locks in on the day you make the loan, based on that month’s rate, and it stays put for the life of the loan no matter where rates go later.³ Most family loans with a written repayment schedule work this way.

Demand Loans

A demand loan has no set maturity; you can call it due whenever you want. For these, the IRS always uses the short-term AFR, and the rate floats. Imputed interest gets recalculated each period at whatever short-term rate is in effect.³ More flexibility, less predictability at tax time.

When You Can Charge Less Than the AFR

Two exceptions in the tax code let you undercharge, or charge nothing, without triggering imputed interest.

The $10,000 Exception

If the total balance you have outstanding with the borrower is $10,000 or less on any day of the year, the below-market rules do not apply. You can loan at zero interest with no gift tax fallout. The exception falls away if the borrower uses the money to buy income-producing assets like stocks or a rental property.³

The $100,000 Cap on Imputed Interest

For gift loans between individuals where the outstanding balance stays at or below $100,000, the imputed interest you have to report is capped at the borrower’s net investment income for the year. If that investment income is $1,000 or less, the IRS treats it as zero, and no imputed interest gets attributed to you at all.³ That wipes out the tax bite on a lot of mid-size family loans where the borrower has little investment income. The exception does not apply if a principal purpose of the arrangement is federal tax avoidance.

Finding the Right Rate for Your Loan

To pick the correct AFR, you need three things: the loan’s term (which sets the tier), the month you sign the loan, and the compounding frequency. The IRS publishes rates for annual, semiannual, quarterly, and monthly compounding. More frequent compounding produces a slightly lower stated rate for the same effective yield.

Every month the IRS releases a new revenue ruling with updated figures, and the full archive going back to January 2000 lives on the IRS Applicable Federal Rates page.⁵ Open the ruling for the month your loan begins and find the row that matches your tier and compounding period. A seven-year family loan signed in March 2026 with annual compounding uses the mid-term rate of 3.93%. A 15-year loan the same month uses the long-term rate of 4.72%.¹

What Happens If You Charge Below the AFR

The imputed interest counts as a gift to the borrower for the year.² For 2026, the annual gift tax exclusion is $19,000 per recipient.⁶ If the imputed interest plus any other gifts you made to that person stays under $19,000, nothing needs to be filed.

Cross the $19,000 line and you have to file Form 709, the gift tax return.⁷ Filing does not automatically mean you owe tax. The overage chips away at your lifetime gift and estate tax exemption, which is $15,000,000 per person in 2026.⁸ The 40% gift tax rate only kicks in once you have used that entire lifetime exemption.

Regardless of whether you collect the interest or the IRS imputes it, you report it as income on Schedule B of Form 1040.

Documenting the Loan So It Counts as a Loan

Charging the right rate only helps if the IRS accepts that a real loan exists. Without a written promissory note, the agency can recharacterize the whole transfer as a taxable gift. A workable note includes:

The full legal names of the lender and borrower
The principal amount
An interest rate at or above the applicable AFR for the tier and month
A specific repayment schedule with due dates
Whether payments are interest-only or include principal

Both sides sign. Notarization adds authenticity but is not legally required in most situations. Move payments through bank transfers or checks rather than cash so there is a verifiable record. A consistent paper trail is what convinces the IRS that a genuine debtor-creditor relationship exists rather than an informal gift or an advance on an inheritance.

1
Internal Revenue Service. Rev. Rul. 2026-6 – Applicable Federal Rates for March 2026
2
Internal Revenue Service. Gift Tax
3
Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
4
Office of the Law Revision Counsel. 26 USC 1274 – Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property
5
Internal Revenue Service. Applicable Federal Rates (AFRs) Rulings
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