What Is the Applicable Federal Rate (AFR)?

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The term applicable federal rate (AFR) refers to the minimum interest rate that the Internal Revenue Service (IRS) requires for private loans or loans between family members.

Definition of Applicable Federal Rate

The IRS publishes a set of AFRs in Section 1274(d) of the Internal Revenue Code each month. They're based on data from market yields of marketable debts, such as U.S. Treasury bills. The parties involved will face tax consequences if the interest rate on a private loan is less than the relevant AFR.

Traditional commercial loans focus on earning as much interest as possible and reducing the risk of default, but private loans are designed to benefit the borrower. The AFR puts a cap on how generous the terms of a private loan can be.

  • Acronym: AFR

The IRS published an annual short-term AFR of 1.85%, mid-term AFR of 2.51%, and long-term AFR of 2.66% in April 2022. Let’s say you decided to lend $5,000 to your child who just lost their job. You’d be required to charge them a minimum interest rate of .2.51% and receive $125.50 if you want them to pay you back in five years because your loan must adhere to the mid-term AFR.


You could face tax implications if you charge no interest rate or an interest rate less than 2.51%.

How the Applicable Federal Rate Works

You must ensure that the length of the loan corresponds to the right AFR if you decide to loan money to a family member:

  • Short-term (three years or less)
  • Mid-term (up to nine years)
  • Long-term (more than nine years)

There won’t be any penalties if you charge more than the appropriate AFR, but you'll be on the hook for taxes if your rate is below it.

Types of Applicable Federal Rates

You'll typically find three types of AFRs: you’ll typically find:

  • Short-term AFRs are based on the one-month average of the market yields from marketable debts of three years or less.
  • Mid-term AFRs are rates that come from debts with maturities that range from three to nine years.
  • Long-term AFRs are bonds with maturities of greater than nine years. 


AFRs are typically much lower than the rates commercial lenders charge, so your family member will still probably land a better deal on a loan from you.

Private Loans vs. Gifts

The IRS considers it a gift if you don’t charge interest on a private loan. You’d have to file IRS Form 709, the gift tax form, for any year in which you give money or assets that are worth more than the annual exclusion. The exclusion is $15,000 in 2021, increasing to $16,000 in 2022.

But the IRS will only charge you tax on any gifts you made if your total lifetime gifts above the annual exclusions total more than $11.7 million in 2021, or $12.06 million as of 2022.

Tips for Lending Money to Family Members

Some tips can help you proceed wisely if you decide to lend money to a relative.

Document the Agreement

Document the terms of the loan regardless of what interest rate you decide to charge a family member when you lend them money. It will allow you to prove whether the agreement was a loan or gift, and it can avoid confusion down the road.

Fill Out Form 1040

Fill out Form 1040 to report your interest income if your private loan has an interest rate equal to or higher than the applicable AFR. You must claim this as taxable income.

Forgive the Loan if Necessary

You can forgive the loan and consider it a gift if your family member can't repay it. You won't have to worry about any tax ramifications unless you exceed the lifetime exclusion of $12.06 million as of 2022.

Key Takeaways

  • AFR is the minimum interest rate the IRS allows for private loans.
  • The three types of AFRs are short-term, mid-term, and long-term.
  • The IRS publishes AFR rates every month.
  • You can charge below the AFR rate when you lend money to a family member, but a lower rate may result in tax consequences.
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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Index of Applicable Federal Rates Rulings," Page 2. Click latest release for updated info.

  2. Internal Revenue Service. "Adjusted Applicable Federal Rates and Adjusted Federal Long-Term Rates," Pages 1-2.

  3. Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2022.”

  4. Internal Revenue Service. "Frequently Asked Questions About Gift Taxes."

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