What Is the Applicable Federal Rate (AFR)?
The Applicable Federal Rate (AFR) is the minimum interest rate the IRS requires on certain loans between family members and other related parties. If you lend money at a rate below the AFR, the IRS treats the difference as a gift from lender to borrower — which can have tax consequences for both parties.
The AFR is published monthly by the IRS and varies based on the loan duration.
Why the IRS created the AFR
Without a minimum rate requirement, family members could use low-interest or no-interest loans as an indirect way to transfer wealth — effectively circumventing gift tax rules. The AFR closes that loophole by requiring that loans charge at least a market-equivalent rate. Any interest "foregone" by charging below the AFR is treated as if it were given as a gift.
This rule applies to loans between related parties — which the IRS defines broadly to include family members, corporations controlled by the lender, and certain trusts.
The three AFR tiers
The AFR is divided into three tiers based on the loan term:
| Tier | Loan duration | Typical rate range (2024–2025) |
|---|---|---|
| Short-term | 3 years or less | 4.5% – 5.5% |
| Mid-term | 3 to 9 years | 4.0% – 5.0% |
| Long-term | More than 9 years | 4.0% – 5.0% |
These are approximate ranges. Actual rates change every month and are tied to Treasury yields. The short-term rate tends to be slightly higher because shorter-term Treasuries often carry higher yields in a normal yield curve environment — though this can invert.
The IRS publishes the exact rates each month in a Revenue Ruling (typically around the 20th of the preceding month). Current and historical rates are listed at IRS.gov/applicable-federal-rates.
How the AFR applies to family loans
For your loan to be treated as a genuine loan rather than a gift, you generally need to charge at least the AFR that was in effect when the loan was made. The rate is locked in at origination for fixed-rate loans — you don't need to update it every month.
A few important thresholds:
Loans of $10,000 or less: The imputed interest rules generally do not apply. You can charge 0% on very small loans without IRS complications (with some limitations).
Loans between $10,001 and $100,000: Imputed interest rules apply, but there's a cap: the imputed interest cannot exceed the borrower's net investment income for the year. If the borrower's investment income is $1,000, imputed interest is capped at $1,000 even if the below-AFR shortfall was higher.
Loans over $100,000: Full imputed interest rules apply with no investment-income cap.
What happens if you charge below the AFR
If your interest rate is below the AFR, the IRS treats the "foregone interest" — the difference between what you charged and what the AFR requires — as if it flowed through two transactions simultaneously:
- The lender gives the foregone interest to the borrower as a gift. This counts against the lender's annual gift tax exclusion and, if it exceeds the exclusion, may require filing Form 709.
- The lender is treated as if they received that interest as income. Even though the cash never changed hands, the lender may owe income tax on it.
In practice, for loans below $100,000 where the borrower has modest investment income, the amounts involved are often small enough that the practical impact is limited. But for larger loans, the difference between charging 0% and charging the current AFR can be significant.
How to find the current AFR
The IRS updates the AFR table monthly. The most reliable source is IRS.gov/applicable-federal-rates, which lists all three tiers for the current and recent months.
When you use the rate, note which tier applies based on your loan's term. A 7-year loan uses the mid-term rate; a 15-year loan uses the long-term rate.
AFR and family loan documentation
Charging the AFR rate is not enough on its own. The IRS also looks for evidence that the transaction is a genuine loan — a written agreement, a repayment schedule, and actual repayments being made. A loan charged at the AFR rate but never repaid is more likely to be reclassified as a gift regardless of the rate.
When you set up a loan in Family Loan Tracker, you can enter any interest rate and the tool calculates exact payment schedules and interest totals, making it straightforward to confirm you're meeting the AFR minimum before committing. A complete payment history in the tracker also serves as documentation of actual repayments — an important part of demonstrating genuine loan intent.
For a deeper look at what the IRS considers a legitimate family loan — and how documentation affects that determination — see our complete family loan tax guide, which covers imputed interest, gift tax implications, and Form 1099-INT in full detail.
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FAQ
Do I have to use the AFR for family loans?
Technically, you can charge any rate you want — but if you charge below the AFR, the IRS treats the difference as a gift. For loans under $10,000, this generally doesn't matter. For larger loans, charging below the AFR can trigger imputed interest rules that create taxable income for the lender, even if no interest cash actually changes hands.
Which AFR tier applies to my loan?
It depends on the loan's term: short-term (3 years or less), mid-term (3 to 9 years), or long-term (more than 9 years). Use the rate in effect during the month the loan was made. For a fixed-rate loan, you lock in that rate at origination — you don't need to update it as monthly rates change.
Where do I find the current AFR?
The IRS publishes current and historical AFR tables at IRS.gov/applicable-federal-rates. Rates are updated monthly, usually around the 20th of the preceding month. Each Revenue Ruling covers all three tiers and multiple compounding periods (annual, semiannual, quarterly, monthly).
Can I charge more than the AFR?
Yes. The AFR is a floor, not a ceiling. You can charge any rate at or above the AFR. The lender will owe income tax on actual interest received, just as they would on any interest-bearing investment. There's no upper limit imposed by the IRS — though anything above market rate would be unusual in a family context.
What if I made a family loan years ago without knowing about the AFR?
The imputed interest rules have applied since 1984, so loans made below the AFR technically had tax implications at the time. In practice, many informal family loans go undocumented and the IRS rarely audits them unless a dispute arises or an estate is probated. If you're formalizing an existing loan, a tax advisor can help you assess any retroactive exposure and the best path forward.
Does the AFR apply to loans in other currencies?
The AFR is a US-specific rule that applies to US taxpayers, regardless of the currency the loan is denominated in. If you're a US taxpayer with a family loan denominated in euros, the AFR rules still apply. Non-US jurisdictions have their own minimum-rate or arm's-length interest requirements for family loans — consult a local tax advisor for specifics.
Do I need to file anything with the IRS for a family loan?
No special filing is required just to make a family loan. However, if the lender receives interest, that interest is taxable income reported on Schedule B. If interest is imputed (charged below AFR) or the loan involves forgiveness that exceeds the annual gift tax exclusion, Form 709 may need to be filed. If you receive $600 or more in interest from a single person, you may receive a Form 1099-INT.
Is the AFR the same as the prime rate?
No. The AFR is set by the IRS based on yields from Treasury securities. The prime rate is set by commercial banks and used as a benchmark for commercial lending. The two track each other loosely (both move with broader interest rate conditions) but they're different rates used in different contexts.
