To lend money to family, do four things: write a signed promissory note, set a real repayment schedule, charge at least the IRS minimum rate (the AFR), and keep a record of every payment. Together, those make it a real loan rather than a taxable gift. Lending to family is one of the most common money moves there is, and one of the least documented. Most people hand over the cash, say "pay me back when you can," and hope for the best. That's how loans turn into resentment, and how the IRS turns a loan into a taxable gift. The four steps below protect everyone.
Step 1 - Write a promissory note
A promissory note is the document that makes a loan a loan. It doesn't need to be complicated; it needs to exist and be signed. Include the parties, the principal amount, the interest rate, the repayment schedule, the start and maturity dates, and what happens if a payment is missed. A signed note is the best evidence that this is a real debt, not a gift.
Step 2 - Set a real repayment schedule
"Pay me back whenever" is not a schedule. Pick a term, build an amortization table (fixed monthly payments of principal and interest), and put it in the note. A real schedule does two things. It meets the IRS's expectation of repayment. And it ends the vague "whenever" that strains families: everyone knows what's owed and when.
Step 3 - Charge at least the AFR
The IRS publishes a minimum interest rate every month - the Applicable Federal Rate (AFR) - and expects family loans over $10,000 to charge at least that. The right AFR depends on the term: short-term (up to 3 years), mid-term (3-9 years), or long-term (over 9 years). As of November 2026 the annual AFRs are 4.67%, 5.08%, and 5.52% respectively.
Charge at least the AFR and there's no gift-tax issue from the interest. Charge less, and the difference is a gift to the borrower, counted once when you make the loan. That's fine if it stays under the $19,000 annual exclusion. Just know it's there.
Step 4 - Move the money and keep records
Make the loan real in the bank, not just on paper: disburse it by transfer, collect repayments on the schedule (autopay if you can), and keep a running record of every payment - principal paid, interest paid, balance remaining. At tax time, the lender reports the interest received as income (a 1099-INT makes this clean). Good records are what hold up if anyone ever asks.
Helping with debt? If the loan is meant to get a relative out of high-interest debt, you can attach covenants - like a required emergency fund or a freeze on new borrowing - so the help sticks. See how to help a relative out of debt without a tax surprise.
Common mistakes to avoid
- No note, or a note no one signed. The easiest way to lose the loan classification.
- Zero or below-AFR interest without realizing it's a gift. Know the AFR floor.
- Never collecting a payment. A loan that's never repaid reads as a gift.
- Forgetting the lender's interest income at tax time.
- Mixing it up with a gift in your head. Decide which it is up front - see loan vs. gift.
Frequently asked
Do I really need a written note for a family loan?
Yes, if you want it treated as a loan. To the IRS, a signed promissory note, a repayment schedule, and AFR-level interest are what separate a loan from a gift.
What interest rate do I have to charge?
At least the AFR for your loan's term. As of November 2026: 4.67% short-term, 5.08% mid-term, 5.52% long-term (annual). The IRS updates these monthly.
Is a small family loan exempt?
Loans of $10,000 or less are generally exempt from the imputed-interest rules, so a small no-interest loan creates no gift-tax issue.
This guide is general information, not tax or legal advice. AFR and gift rules change; verify current figures with the IRS and consult your CPA or attorney before structuring a loan.
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