What is the AFR (Applicable Federal Rate)?

The Applicable Federal Rate is the minimum interest rate the IRS requires for private loans, published monthly and tiered by term (short-term up to 3 years, mid-term 3-9 years, and long-term over 9 years). Charging at or above the AFR keeps a family loan from being recharacterized as a gift.

What happens if a family member does not repay the loan?

If the loan is genuinely uncollectible and was properly documented as a bona fide loan, it may qualify as a non-business bad debt for tax purposes. Documentation - a signed note, a real interest rate, and a payment record - is what makes that treatment possible, which is why structuring the loan matters.

Intra-Family Lending: The Complete Guide (2026)

Last updated July 15, 2026 · ~12 min read · Educational, not tax or legal advice

Intra-family lending is the practice of one family member lending money to another under a formal, documented agreement, with a set interest rate, a repayment schedule, and a signed promissory note, instead of handing over cash informally. Done correctly, it lets a family lend at rates well below a bank's, keep the interest inside the family, and transfer wealth tax-efficiently, all while keeping terms clear enough to protect the relationship.

$200–400BLent between US family members every year

$84TGenerational wealth transfer underway through ~2045

~80%Of AUM is typically lost when wealth passes to heirs

What is intra-family lending?

Intra-family lending, sometimes called family lending or "the Bank of Mom and Dad", is when one family member acts as the lender to another, using a real loan structure rather than an informal handout. A parent might fund a child's first home, a grandparent might finance a grandchild's education, or a sibling might bridge a business. The defining feature is that it is a bona fide loan: there is a stated interest rate, a repayment schedule, and documentation, so both the family and the IRS treat it as a loan.

The appeal is simple. A bank sits between most borrowers and lenders, charging the borrower a high rate and paying the saver a low one. When a family lends to itself, that spread disappears: the borrower pays less than a bank would charge, the lender earns more than idle cash, and the interest stays inside the family instead of leaving it.

How big is the Bank of Mom and Dad?

Family lending is one of the largest and least-visible corners of consumer finance. Families in the United States are estimated to lend one another on the order of $200–400 billion every year, enough that, taken together, the Bank of Mom and Dad rivals the country's largest consumer lenders. Meanwhile, an estimated $84 trillion in wealth is expected to pass between generations through roughly 2045, according to widely cited industry research. Most of that money still moves informally, undocumented, and untracked.

Intra-family loan vs. gift vs. bank loan

Families helping the next generation usually have three options. Here is how they compare:

	Intra-family loan	Outright gift	Bank loan
Interest rate	At or above the AFR (low)	None	Market rate (high)
Where interest goes	Stays in the family	N/A	To the bank
Wealth transfer	Efficient, growth above the AFR passes to the borrower	Immediate; uses annual exclusion or lifetime exemption	None
Reversibility / control	High, can restructure or forgive over time	None once given	None
Documentation	Promissory note + payment record	Gift-tax return if above the annual exclusion	Bank underwriting & paperwork
Relationship risk	Low when clearly structured	Low	N/A

For many families the best answer is a blend: a loan that funds the need now, with a portion strategically forgiven later within gift-tax limits. See Intra-Family Loans vs. Gifts for a deeper comparison.

How to set up an intra-family loan (step by step)

Agree on the terms.Decide the amount, purpose, interest rate, and repayment schedule together, and write the expectations down before any money moves.
Set a rate at or above the AFR.Use the IRS Applicable Federal Rate for the loan's term in the month you close. This is what keeps the loan from being treated as a gift.
Sign a promissory note.Document the principal, rate, repayment schedule, and what happens on late or missed payments in a written, signed note.
Check affordability.Confirm the repayment genuinely fits the borrower's real cashflow, so the loan never quietly strains the family.
Fund it and automate repayment.Transfer the funds and set up auto-pay, so payments happen on their own and no one has to chase anyone.
Keep records (and plan any forgiveness).Track every payment and keep the note. If you plan to forgive part of the balance, do it on a schedule within the annual exclusion.

This is exactly the workflow Pari automates end to end, generating the note, tracking the AFR, running an affordability check, and handling repayments.

The Applicable Federal Rate (AFR), explained

The Applicable Federal Rate (AFR) is the minimum interest rate the IRS requires for private loans. It is published monthly and tiered by the loan's term: short-term (up to 3 years), mid-term (over 3 and up to 9 years), and long-term (over 9 years). Charge at least the AFR that applies in the month you make the loan, and the arrangement is respected as a loan. Charge less, and the IRS can treat the foregone interest as a gift (this is the "below-market loan" rule). Crucially, the AFR is usually far below what a bank or mortgage lender charges, so a family loan can be fully compliant and still save the borrower meaningfully. Read more in Understanding the AFR.

Gift-tax rules for family loans

Two numbers matter. The annual gift-tax exclusion is the amount you can give each recipient per year without filing a gift-tax return ($19,000 per recipient in 2025; the figure is indexed for inflation and updates annually). The lifetime gift and estate tax exemption is the much larger cumulative amount you can transfer before gift or estate tax applies ($13.99 million per individual in 2025). A properly structured loan is not a gift and uses neither, but two situations trigger the gift rules:

Charging below the AFR. The foregone interest can be treated as a gift to the borrower.
Forgiving the loan. Any amount forgiven is a gift in the year it is forgiven.

Smart families use this deliberately: fund a need with a loan, then forgive a slice each year within the annual exclusion, moving wealth gradually and tax-efficiently. See Gift-Tax Basics and When to Forgive a Family Loan. Tax figures change yearly, always confirm current IRS amounts with a qualified advisor.

How to document a family loan

Documentation is what separates a loan from a gift in an audit. At minimum, a defensible family loan has:

A written, signed promissory note stating principal, interest rate, and repayment terms;
An interest rate at or above the AFR for the loan's term;
A fixed repayment schedule, and evidence that repayments actually occur;
A record of every payment (a ledger or statements);
Where relevant, a recorded lien (for example, on a home).

More detail in How to Document a Family Loan the IRS Will Respect.

Affordability: making sure the loan actually fits

The most common failure in family lending isn't legal, it's that the repayment quietly doesn't fit the borrower's life, and resentment builds. Good practice is to underwrite affordability up front: look at the borrower's real income and spending and confirm the schedule is comfortable before any money moves. Modern tools read live cashflow through open banking rather than relying on a backward-looking credit score, giving the Bank of Mom and Dad the same real-time intelligence a bank uses. See Why Real-Time Cashflow Beats a Credit Score.

Protecting the relationship

The dollars are rarely what damages a family, ambiguity is. Clear terms, automated repayment, and private, borrower-facing reminders mean no one has to play collector, and a missed month becomes a small adjustment rather than a lasting grievance. The goal is to help without creating dependency: structure turns a handout into a hand up. See The Relationship Risk in Family Lending and Helping Without Hurting.

For financial advisors & RIAs

Clients lend to their children with or without their advisor's involvement. When it happens off the radar, it introduces tax risk and moves assets out of the managed relationship. Facilitating structured intra-family lending is a fiduciary-aligned service: it protects the client, documents the arrangement, and keeps capital and AUM inside the household. It is also one of the few natural ways to build a relationship with the next generation before the wealth transfer, the moment roughly 80% of AUM tends to walk out the door. See The Fiduciary Case for Facilitating Family Lending and Why Advisors Lose Most of Their AUM at Inheritance.

Common mistakes to avoid

No paperwork. An undocumented "loan" can be recharacterized as a gift, potentially taxing the entire principal.
Charging no interest. Below the AFR, the IRS may impute interest or treat the shortfall as a gift.
No repayment record. If payments aren't tracked, it doesn't look like a real loan.
Ignoring affordability. A schedule the borrower can't carry is where relationships fray.
Informal forgiveness. Blanket, undocumented forgiveness can unravel the loan's tax treatment.

Frequently asked questions

Do you have to charge interest on a family loan?

To keep it a loan and not a gift in the eyes of the IRS, you generally must charge at least the AFR for the loan's term. Below that, the IRS can impute interest or treat the shortfall as a gift (a de minimis exception applies to small loans). The AFR is typically far below a bank's rate.

How much can you lend a family member tax-free?

There is no limit on the loan amount. A properly structured loan at or above the AFR is not a gift at all, regardless of size. Gift-tax limits only matter if you charge below the AFR or forgive part of the balance.

Can you forgive an intra-family loan?

Yes, forgiven amounts are treated as gifts. Many families forgive a portion each year within the annual exclusion, transferring wealth gradually and tax-efficiently.

What if a family member doesn't repay?

A genuinely uncollectible loan that was properly documented as a bona fide loan may qualify as a non-business bad debt. Documentation is what makes that treatment possible.

Key takeaways

Intra-family lending is a real, documented loan between family members, not an informal handout.
Charge at least the AFR to keep it a loan, not a gift; the rate is still far below a bank's.
Always use a promissory note and keep a record of payments.
Combine a loan with strategic forgiveness within the annual exclusion for tax-efficient wealth transfer.
Underwrite affordability and automate repayment to protect the relationship.
For advisors, it keeps capital, AUM, and the next generation in the household.

Pari structures, tracks, and underwrites all of this for you.

This guide is for general educational purposes and is not tax, legal, or financial advice. Tax figures cited are current as of 2025 and change annually; consult a qualified professional about your situation.