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Question for the Money Doctors

Question submitted on Nov 12, 2013.

Question

I am going to loan my daughter a substantial amount of money. What is the lowest interest rate I can legally charge her?

Answer

The below market interest rate rules require that you charge a minimum amount of interest on the loan to your daughter.  Generally, family loans of less than $10,000 are exempt from the rules.  The best way to avoid the complexity of the above rules is to document the loan in writing and to select an interest rate which is at least equal to the minimum rate required by law. 

The minimum interest rates are published monthly, and are referred to as the applicable federal rates (AFR).  The AFR varies based on the term and type of the loan.  For example, demand loans that are outstanding for the entire year are eligible to use a "blended" annual interest rate, which is currently .22%.  Please note that these rules are very complex, and I therefore suggest that you contact a CPA/PFS in your area (findaCPAPFS.org) to help you sort through your available options.


For additional information visit http://www.360financialliteracy.org/