Family Loans: How to Approach Lending Money to Loved Ones
Borrowing money from your family may sound like a no-brainer. You don’t need perfect credit, and you could save serious money on interest with a family loan. Plus, the stakes might feel lower when you borrow from a person you know rather than a corporation.
But family loans do come with risks. If you start missing payments, you could lose the relationship instead of merely losing points on your credit score. You’ll also need to consider tax implications and IRS guidelines to legally lend to or borrow from family.
- Borrowing money from family can be a smart move when you can’t qualify for or afford a traditional loan.
- Family members may offer below-market rates, helping you save money on your loan.
- Protect your relationship and finances by having a direct conversation and setting expectations with your family members.
How do family loans work?
A family loan is money one family member lends to another with the expectation of repayment. They operate like a personal loan, but you and your family member can work together to come up with unique terms that work for both of you.
| Family loan | Personal loan | |
|---|---|---|
| Lender | Family member or friend | Bank, online lender or credit union |
| How to qualify | Typically no application necessary | Submit application and undergo credit check |
| Cost | Typically interest-free (but up to family member) | Typically around 8% to 36% APR |
| Consequences of missed payments | Up to you to decide with family member, but typically causes relationship strain | Late fees, damage to credit, account eventually goes to collections |
| Benefits | Customizable terms, low rates, less paperwork | Clear expectations, no risk to relationships |
| When it makes sense | Small dollar amounts or when you have trouble getting approved by traditional lenders | If you have the income and credit score to qualify for favorable terms |
| When it doesn’t make sense | Your relationship is already strained or if you’re unsure if you can repay the money | The interest rate and terms you qualify for make the loan payments unreasonable |
Before you exchange money with a family member, make sure you agree on:
- Loan amount
- Repayment schedule
- Monthly payment amounts
- What happens if payments are missed
- Communication about loan payments
- How you’ll handle job loss or other financial hardships (on either end)
Rules of family loans
The beauty of family loans is that they are completely customizable. Aside from charging a minimum interest rate to avoid imputed, or assumed, taxes, you’re not bound by traditional loan terms. You don’t need a mountain of paperwork, either. The loan terms can be agreed upon with a handshake, a detailed loan agreement or anywhere in between.
The biggest concern with family loans is ensuring that you avoid any impacts to your taxes and annual or lifetime gift limits. If the loan is under $10,000, then you typically don’t have to worry about tax implications. However, for family loans of $10,000 or more, you’ll need to proceed with caution.
When the loan is less than $10,000, you have a lot of leeway in terms of rates and repayment terms. In fact, you can loan money to a family member without charging any interest, so long as the loan is less than $10,000.
When the loan is $10,000 or more, to avoid imputed interest and gift tax consequences, the IRS requires that you charge a minimum interest rate called the applicable federal rate (AFR). The IRS sets these rates on a monthly basis, and they’re typically much lower than the rates that you’ll get with traditional lenders.
The family member who is lending money will also need to pay income tax on the interest they receive. If you charge your loved one an interest rate below the AFR, you may owe taxes on imputed interest.
While there aren’t many rules when it comes to family loans, you do need to take steps to safeguard your money (and your relationship with the borrower).
What happens when the borrower can’t repay
While your family member likely has every intention of repaying you, what happens if the borrower stops making payments? You don’t want to lose the money, and neither of you wants to hurt the relationship.
Life happens, so it’s important to discuss what you both plan to do in this scenario before creating a family loan. As with most things in life, communicating ahead of time is a smart move.
As a lender, you can pursue collection efforts against the borrower. To get repaid, you could renegotiate the loan terms, take another item of value instead of payment or file a lawsuit. Alternatively, you could forgive the loan and consider it a gift, though you – the lender – may owe a gift tax as a result.
If your loved one can’t pay you back, you may qualify for a bad debt deduction on your taxes. To do so, you’ll need to prove the debt is worthless and there is no chance of repayment.
To do this, you’ll need:
- Your loan agreement
- The debtor’s name
- Documentation of how much you loaned
- A written statement indicating the borrower’s inability to repay
- Supporting documentation, like letters, invoices and a log showing the various attempts you made to collect the debt
Family loan risks
Lending to a family member can help them when they’re in a bind. However, there are risks to your relationship when creating a family loan. The stakes seem lower since you’re borrowing from someone close to you, but it can have lifelong repercussions if something goes wrong.
- Even if things go according to plan, there can be misunderstandings or hurt feelings. The borrower may think you should have just given the money as a gift or that you’re charging an interest rate that’s too high or that the repayment term is too short.
- Discuss every aspect of the loan, including the uncomfortable aspects of the transaction. This can go a long way toward minimizing hurt feelings. Talk about what would happen if you can’t repay the loan or just need time to get caught up on payments. While banks have strict terms when these situations occur, a family loan is more fluid.
- Once you’ve agreed to all of the terms, put them down in writing. Give each other time to review the agreement with a trusted friend or family member. Neither party should feel rushed into entering into a family loan agreement.
While getting this money may seem important at the time, a hurried loan between family members could lead to lost relationships and hurt feelings that can last a lifetime.
It happens more often than people think. In fact, a LendingTree survey found that 36% of Americans have lost friendships over money.
Protect your relationship with a written agreement
Having a loan agreement in place will ensure that both parties are on the same page about the exact loan terms and consequences if the borrower isn’t able to make payments on time.
Your loan contract should be written and signed by both parties, and it is recommended that you get it notarized or signed by a witness.
Your family loan agreement should include the loan amount, method of payment, when payments will be made and what will happen if you pay off the debt early, miss payments or stop paying entirely.
You can find family loan templates online on sites like TemplateLab and Legal Templates. Online services like ZimpleMoney can track loans, automate payments and provide detailed reports that can simplify tax preparation.
As you draw up your family loan contract, use our personal loan calculator to estimate your monthly payment and calculate the total amount you’ll pay in interest.
What rates to charge
While the IRS applicable federal rates are the minimum you can charge without tax penalties, you can charge family members higher rates. Understanding what the average personal loan interest rates are allows you to evaluate a range of rates for the family loan — a floor based on the monthly AFRs and a ceiling based on average APRs for different credit profiles.
If you’re looking to earn a reasonable return on your money, consider setting the family loan interest rate midway between the AFR and the average APR for borrowers with excellent credit. Doing so would provide a solid return for you, while also offering a more favorable rate than your family member might find at a traditional lender.
| Credit tier | Average APR |
|---|---|
| Excellent (800 and above) | 15.34% |
| Very good (740-799) | 17.46% |
| Good (670-739) | 22.70% |
| Fair (580-669) | 27.52% |
| Poor (under 580) | 30.51% |
Calculate your monthly loan payments
Family loan alternatives
Lending money to family isn’t for everyone, and it comes with risk to your relationships and finances. Whether you’re the potential lender or recipient, considering the following alternatives may help you avoid future tax implications and strained relationships with your loved one.
Gifting
Best for family members who are unlikely to follow through on paying back the money.
If you can afford it and don’t want to risk the relationship, consider giving your family member the money as a gift rather than offering a loan. You’ll avoid potential tension and conflict, and you won’t have to deal with the hassle of drafting a formal loan agreement or potentially paying income tax on any interest the family loan incurs.
But you’ll still need to play by IRS rules if you choose to gift the money.
As of 2026, you can give someone up to $19,000 a year without having to report it to the IRS and potentially incurring a gift tax. You’ll need to report any money you give to someone that exceeds that amount on a gift tax return.
Personal loans
Best for borrowers who want to build a good credit history.
Getting a personal loan can help you build credit and avoid family tension and complex tax implications that often come with family loans. Whether you’re worried about meeting personal loan requirements or you need fast cash, there’s likely a personal loan designed for your unique financial situation.
Here are some personal loan alternatives to family loans, along with their benefits.
| Loan type | Benefit | What is it? |
|---|---|---|
| Secured loan | Easier to qualify for than unsecured loans | A loan guaranteed by collateral like physical property or a savings account |
| Credit-builder loan | Build credit | A loan designed to help borrowers with thin or no credit history build credit |
| Bad credit loan | Designed for borrowers with bad credit | A loan with low eligibility requirements that doesn’t charge predatory rates |
| Quick loan | Fast funding | A loan that offers quick — often same-day — access to cash |
Cosigning
Best for borrowers who cannot get approved for a loan based on their credit or income.
People with good or excellent credit can help a loved one borrow money by cosigning a loan. Doing so often means borrowers can qualify for lower rates than on their own. Having a third party facilitate the loan can minimize some of the stress, tension and paperwork associated with mixing family and finances.
But there’s still the risk of familial strain: If your family member defaults on the loan, you’ll be on the hook to pay it off, and a loan in default (or any missed payments, for that matter) can impact your credit.
Frequently asked questions
The IRS doesn’t require you to charge interest on loans of less than $10,000, as long as the money isn’t used to buy income-producing assets or tax avoidance wasn’t the purpose of the loan.
Family loans generally are not reported to the credit bureaus, even if there’s a late payment or a default. However, if the person lending the money gets a judgment against the borrower to recover the unpaid balance, that can affect the borrower’s credit.
Interest earned through family loans is generally not considered income if the loan amount is under $10,000. For loans above this amount, you must charge at least the applicable federal rates to avoid being taxed on imputed interest. If the loan is forgiven, it may be treated as a taxable gift and subject to annual and lifetime gift exemption limits.
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