Understanding the AFR: The Rate Every Family Loan Needs

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The Applicable Federal Rate is the minimum interest a family loan should charge to stay clean with the IRS.

When one family member lends to another, the IRS expects at least a minimum rate of interest - the Applicable Federal Rate, or AFR, published monthly and tiered by loan term. Charge less, and the difference can be treated as a gift, with tax consequences that surprise families after the fact.

The good news: the AFR is typically well below what a bank would charge, so families can be fully compliant and still give the borrower a great deal. Pari tracks the current AFR automatically and structures each loan above it, so compliance is never something a family has to think about.