Which AFR Rate to Use for Family Loans
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There are a few different AFR rates available for family loans – so which one should you use? This blog post covers the different rates and how to choose the best one for your needs.
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The AFR Rates
The AFR rates are the rates set by the IRS for family loans. The AFR rates change every three months. The current AFR rates are:
The AFR for related parties is the rate published monthly by the IRS for use with loans between family members. The rates are low, and vary depending on the term of the loan and whether the loan is secured or unsecured.
For loans made in 2020, the annual rates are:
-2.48% for loans with a term of 3 years or less
-2.75% for loans with a term greater than 3 years but not greater than 9 years
-3.03% for loans with a term greater than 9 years
The AFR for other loans
The AFR for other loans is the “applicable federal rate” set monthly by the IRS. For loans made in 2020, the AFR for unsecured loans is 0.25%, which is incredibly low. That means that if you made an $8,000 loan to a family member at 0.25% interest, you’d only have to pay $20 in interest for the entire year.
The AFR for secured loans is a bit higher, but still very low by historical standards. For loans made in 2020, the AFR for secured loans is 2.27%. So if you made a $20,000 loan to a family member and charged them 2.27% interest, you’d only have to pay $455 in interest for the entire year.
Of course, you can charge more or less than the AFR, but if you charge more than the AFR then you may have to pay taxes on the “imputed interest” (the difference between what you actually charged and what the AFR was). And if you charge less than the AFR, then you may be missing out on some potential tax deductions.
What is the best AFR rate to use?
The AFR rate you use for your family loans can have a big impact on your taxes. If you use the wrong rate, you could end up paying a lot more in taxes than you need to. In this article, we’ll go over what the AFR rate is and how to choose the right one for your family loans.
The AFR for loans between family members
The AFR for loans between family members can vary depending on the purpose of the loan and the relationship between the borrower and lender. In general, however, the AFR for these types of loans should be lower than the rate charged by commercial lenders.
There are a few different AFR rates that can be used for loans between family members. The most common rate is the prime rate, which is the rate charged by banks to their most creditworthy customers. The prime rate is currently 3.25%.
Another common AFR is the federal short-term rate, which is the rate charged on short-term Treasury bills. This rate is currently 0.09%.
For loans that are not secured by collateral, many lenders will charge a higher interest rate, known as the risk premium. The risk premium can vary depending on the lender, but it is typically 1% to 2% above the prime rate.
The AFR that you ultimately choose for your loan should be based on your specific circumstances and objectives. If you are looking for a low-cost loan, you may want to consider using the prime rate or federal short-term rate. If you are willing to accept a higher interest rate in exchange for less risk to your lender, you may want to consider using a risk premium.
The AFR for other loans
Other non-mortgage loans may use the Applicable Federal Rates set by the IRS for different purposes. The AFRs for term loans and lines of credit are generally lower than the AFRs for credit cards and other forms of revolving credit. This is because the IRS views term loans as investments in a business, rather than as consumer debt. The AFRs for student loans are generally lower than the AFRs for other types of loans because the government wants to encourage people to get an education.
