Should I Charge Interest on a Loan to Family?

The pros, cons, and tax implications of charging interest on personal loans to relatives.

Should I Charge Interest on a Loan to Family?

The pros, cons, and tax implications of charging interest on personal loans to relatives.

Your sibling needs $20,000. You have it. Should you charge interest?

Here is what to consider.

Arguments for Charging Interest

1. It Is Fair Compensation You are giving up access to your money. Interest compensates you for that.

2. It Sets Expectations Charging even a small rate signals this is a serious loan, not a gift.

3. Tax Considerations For large loans, the IRS may require you to charge minimum interest (the Applicable Federal Rate). Otherwise, they may treat it as a gift with tax implications.

Arguments Against Charging Interest

1. Family Should Help Family Many cultures view interest-free loans between family as expected and appropriate.

2. Simplicity Calculating interest adds complexity. A flat amount is easier to track.

3. Relationship Preservation Charging interest can feel transactional and cold.

The Middle Ground

Consider these options:

- No interest, but on time. "I won't charge interest, but I need payments on time." - Token interest. A small rate (1-2%) acknowledges the loan's seriousness without being burdensome. - Below-market rate. Less than a bank would charge, but something.

IRS Rules (For Large Loans)

If you lend more than $10,000, the IRS expects you to charge at least the Applicable Federal Rate (AFR). As of 2025, that is around 4-5% for long-term loans.

If you do not charge interest, the IRS may treat the forgone interest as a gift from you to the borrower.

Consult a tax professional for loans over $10,000.

What Most Families Do

Most family loans under $10,000 are interest-free. The lender views it as helping family, and the borrower commits to timely repayment.

Whatever you decide, put it in writing. Clarity prevents conflict.