How it works
A family loan formalizes intra-family lending into a documented agreement with a stated rate, schedule, and expectations — and the interest rate is not merely a kindness knob. Tax rules contain minimum-rate concepts (in the US tradition, published monthly AFR-style benchmarks) under which interest charged below the benchmark may be treated as partly imputed: the lender can be taxed as if market-rate interest were received, and part of the arrangement can be recharacterized as a gift, with gift-tax reporting consequences above exclusions. Small loans generally fall under exceptions that waive imputation entirely, and thresholds change — which is exactly why this calculator keeps the benchmark as an adjustable input labeled illustrative rather than embedding a statutory figure. The mechanics shown here are simple: amortize the loan at your chosen family rate, amortize it again at the floor-style benchmark, and display the interest shortfall between them — the slice whose treatment depends on the rules of the year. On $12,000 over three years, charging 2% against a 3.5%-style benchmark leaves roughly $180 uncharged. Whatever the rate, the durable advice is procedural: write the agreement, schedule the payments, and treat it as a bank transaction with warmer greetings — documentation protects both the relationship and the return.
Formula
Charged interest = amortized interest at family rate | Benchmark interest = amortized interest at floor rate | Shortfall = benchmark − charged
Tips
- Put the rate, term, and schedule in writing signed by both parties.
- Check the current monthly benchmark rate before setting yours — they move.
- Small loans often fall under imputation exceptions — verify current thresholds.
- Charge something: even token interest documents this as a loan, not a gift.
- Missed-family-payment conversations go better with a schedule everyone signed.
Frequently asked questions
- Do you have to charge interest on a family loan?
- Not always — smaller loans frequently qualify for exceptions that waive minimum-interest imputation entirely, and thresholds shift over time. Charging some interest remains good practice regardless: it evidences a genuine loan, protecting both parties if relationships or tax reviews ever turn formal.
- What happens if I lend money interest-free?
- Depending on size and rules of the year, tax logic may impute interest anyway — taxing the lender as though benchmark interest arrived and treating part of the arrangement as a gift for reporting purposes. Most family-sized loans dodge this via exceptions; larger sums deserve a tax professional's glance.
- What is imputed interest on a family loan?
- The interest tax rules pretend was charged when your actual rate sits below their benchmark: the lender recognizes phantom interest income and the difference may count as gifted. On $12,000 over three years, charging 2% versus a 3.5% benchmark creates about $180 of the stuff.
- How should I document a loan to a family member?
- Like a bank would: a signed promissory note stating amount, rate, term, and payment schedule; a record of disbursement; and a paper trail of repayments. Ten minutes of formality prevents the decade of resentment that undocumented family money famously produces.
- Is interest my family pays me taxable income?
- Yes — interest received is generally taxable to the lender wherever the loan lives. Keep the amounts visible in your records; the rates here determine both what the borrower pays and what lands on your return, so pick them deliberately rather than sentimentally.