Intrafamily Loan AFR Rates, Explained

Source: The Family Bank & AFR Lending Starter Kit — the Family Banking Guide, the Promissory Note template (Section 3), and the Official IRS Forms hub in folder 00 of the Complete OS. This page publishes that kit's own teaching as a standalone guide; it adds nothing the kit doesn't say.

What the AFR is

AFR stands for Applicable Federal Rate: a set of interest rates the IRS publishes every single month. Think of it as a speed limit in reverse — the IRS doesn't tell you exactly what rate to charge, but it posts a minimum. Charge at or above it, and you're driving legal.

The three tiers

The rate you need depends on how long the loan lasts:

Short-term — loans of 3 years or less.
Mid-term — loans over 3 years, up to 9 years.
Long-term — loans over 9 years.

Why charging less backfires

The IRS watches family loans closely, because a 0% "loan" to your kid is often just a gift wearing a costume. If you charge less than the AFR — or nothing at all — the IRS can treat the interest you didn't charge as a gift you secretly made. The kit calls these surprise gifts: surprise paperwork, and possibly surprise taxes.

The 3 steps the kit teaches

Step 1 — Pick the term, look up the rate. Decide how long the loan lasts. That tells you which AFR tier you need. Then pull this month's AFR for that tier from irs.gov (search "Applicable Federal Rates"). Write down the rate, the month, and where you found it — it goes into the note.

Step 2 — Write it down like a bank would. Fill out the promissory note: who's lending, who's borrowing, how much, the interest rate from Step 1, the term, the payment schedule, and signatures. Move the money cleanly, with a paper trail.

Step 3 — Secure it and make it official. A real bank never lends unsecured. Real-estate loans get backed by a recorded mortgage or deed of trust; business loans by a lien on the business assets, filed by your attorney. Then hold the family meeting: present the terms, approve the loan, sign everything, and record it.

The rule that protects you: never bake a rate in

AFR changes monthly. Last month's number is already old news, and a rate quoted in a book or course — including ours — is not a rate you can use. Your note states the actual rate you looked up for the current month, and the Family Loan Amortization Calculator in the kit always runs on the current month's number. When in doubt: check current IRS guidance or ask your attorney or CPA.

Keep going

This is one piece of the lending layer. The full sequence — family bank constitution, meeting agenda, note template, and calculator — is in the Family Bank & AFR Lending Starter Kit, and in the Complete OS. Related guide: LLC charging-order protection, explained.

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