How the AFR works
What is the Applicable Federal Rate?
The AFR is a set of minimum interest rates the IRS publishes monthly. For a loan between family members above $10,000, charging at least the AFR keeps the IRS from treating the loan as a disguised gift. It's the floor, not a set rate. You can charge more.
Which AFR applies to my loan?
The one that matches your note's term: short-term for loans up to 3 years, mid-term for over 3 and up to 9 years, and long-term for over 9 years. Use the term of your note, not the borrower's age or anything else.
What if I charge less than the AFR?
The gap between the AFR and your rate is treated as a gift to the borrower. On a loan with a set term, it's counted once, the day you lend: the amount you lend, less what the payments are worth today at the AFR. On a large loan at little or no interest, that can pass the $19,000 annual exclusion on its own. The imputed-interest calculator shows the gift amount.
General information, not tax or legal advice. AFRs change every month, so check the current figure with the IRS before you sign a note.