What is the minimum interest rate for loans to family members?
2.72% for “short-term” loans of three years or less. 3.03% for “mid-term” loans of more than three years but no more than nine years. 3.26% for “long-term” loans more than nine years.
As of April 2023, the minimum annual rate was 4.86% for short-term loans; 4.15% for mid-term loans; 4.02% for loans more than nine years. If the parties involved are not paying and collecting at least that much interest, the IRS could deem the money a “gift” and apply gift taxes, depending on the amount.
6 Let's say you were giving a loan to a family member for $10,000 to be paid back in one year. You would need to charge the borrower a minimum interest rate of 4.30% for the loan. In other words, you should receive $430 in interest from the loan. In our example above, any rate below 4.30% could trigger a taxable event.
The minimum required interest rate is called the Applicable Federal Rate (or “AFR”), sometimes the “arm's length” rate. The IRS effectively requires the AFR to be charged by imposing tax consequences on loans with interest rates lower than the AFR (even zero percent) and loans that are silent as to interest.
The IRS mandates that any loan between family members be made with a signed written agreement, a fixed repayment schedule, and a minimum interest rate. (The IRS publishes Applicable Federal Rates (AFRs) monthly.)
In fact, you can loan money to a family member without charging any interest as long as the loan is less than $10,000. When the loan is $10,000 or more, the IRS requires that you charge a minimum interest rate called the applicable federal rate (AFR).
The $100,000 Loophole.
To qualify for this loophole, all outstanding loans between you and the borrower must aggregate to $100,000 or less. Under this loophole, if the borrower's net investment income for the year is no more than $1,000, your taxable imputed interest income is zero.
Successfully loaning money to family requires clear communication and maybe even a written loan agreement. Family lenders must also consider IRS guidelines. Here's what to know about getting a personal loan from a family member, including the pros and cons, how to formalize a family loan and alternatives to consider.
On the borrower's side, there are typically no tax implications. The borrower doesn't typically need to report the loan and won't pay any income tax on it. In some cases, the borrower may get a tax perk from borrowing money from family.
There is no minimum interest rate you are required to charge, but you will be liable for taxes if you decide to give a below market interest loan to the IRS. This is because as a lender, you are expected to charge market interest and if you don't do so, you are in effect liable for the interest foregone on the loan.
What is the minimum rate of interest for a personal loan?
Personal loan interest rates and applicable charges. 11% to 32% p.a. Up to 3.93% of the loan amount (inclusive of applicable taxes). *Loan amount includes approved loan amount, insurance premium, and VAS charges.
| SBI Bank | Starting at 9.65% |
|---|---|
| HDFC Bank | 10.75% - 21.45% |
| ICICI Bank | 10.99% - 18.49% |
| IndusInd Bank | 11.25% |
| Kotak Mahindra Bank | 10.99% - 20.99% |
Minimum Interest Charge . If your account is subject to interest charges in a billing cycle and those interest charges are less than the Minimum Interest Charge listed in the Schedule, you will be charged the Minimum Interest Charge. Under law, the Minimum Interest Charge is treated as a fee.
Just charge a rate equal to the long-term AFR (3.26% in December of 2018). Your daughter can pay that same low rate for the entire 15-year loan term. However, these rules apply to term loans. When you make a demand loan, which can be called in anytime, the AFR isn't fixed in the month you make the deal.
| The AFRs are as follows: | Annual | Monthly |
|---|---|---|
| Short-term (up to 3 years) | 5.12% | 5.01% |
| Mid-term (3 to 9 years) | 4.66% | 4.57% |
| Long-term (over 9 years) | 4.79% | 4.68% |
While lower rates are an attractive aspect intra-family loans, there are several other benefits to be found. Intra-family loans are flexible and can be structured as interest-only or amortized.
Minimum-interest rules refer to a federal law that requires that a minimum rate of interest be charged on any loan transaction between two parties. The minimum-interest rules mandate that even if the lender charges no rate, an arbitrary rate will be automatically imposed upon the loan.
The formula to determine simple interest is an easy one. Just multiply the loan's principal amount by the annual interest rate by the term of the loan in years.
A family loan agreement shares the same basic elements with other lending contracts. It should specify a repayment term and payment schedule, an interest rate, and other contingencies, such as how late payments or a default will be handled. Notarizing your agreement is also recommended.
While a loan like this may trigger a tax bill for you, it could also potentially provide a tax deduction. That would occur if the family member failed to pay back the loan. In that case, you could write the unpaid amount off as a loss and claim a deduction from income on your taxes.
Can I gift the interest on a family loan?
If it is a legitimate bona fide loan, with the expectation of being paid back, the lender must charge interest and report the interest as taxable income. If the interest is paid, but later gifted back to the borrower, it is still taxable income to the lender.
To prevent tax avoidance, IRC 7872 requires that loans between related parties (including family members) bear a minimum amount of interest based on applicable federal rates (AFRs). This rule applies to loans usually exceeding $10,000. if you make it a gift, there may be the need to file a gift tax return.
You don't have to worry about family loans being subject to federal tax consequences if: You lend a child $10,000 or less, and the child does not use the money for investments, such as stocks or bonds.
This means you must charge and collect interest following the rules for the applicable federal rate. The minimum interest rate varies based on the length of the loan. If you lend the money at no interest, the IRS can consider the loan a gift, making you liable for gift taxes.
A gift loan is essentially a loan with an interest rate well below the market average, or even no interest at all, which can be a strategic way to support family members financially or for estate planning purposes.
