You agreed to lend a friend or relative some money, and now you are stuck on one question: how much interest should you charge? Charge too little and the IRS may treat it as a gift. Charge too much and you could break your state's usury law.
This guide walks through how to set a fair, legal rate, the IRS minimum you should know about, and the legal ceiling you cannot cross. Figures are current as of June 2026.
Start With What the Market Charges
A fair private loan rate usually sits somewhere near what a bank or lender would charge the borrower. That gives you a reasonable anchor.
As of June 2026, the average personal loan rate for a borrower with a 700 credit score is around 12% for a typical three-year loan. Rates run lower for excellent credit and much higher for weaker credit, with subprime borrowers often facing APRs near the 36% range that most lenders treat as a ceiling.
So if you want to be generous to a borrower who would otherwise pay a bank 15% or more, you might charge something well below that, while still charging enough to keep the loan a loan and not a gift.
Do Not Charge Zero: The IRS Minimum
This surprises a lot of people. If you make a sizable loan with little or no interest, the IRS can treat the forgone interest as a taxable gift or as imputed income to you.
To avoid this, the IRS publishes the Applicable Federal Rate (AFR) each month. It is the minimum interest rate you should charge on a private loan to keep it clean for tax purposes. The AFR varies by the length of the loan, short, mid, or long term.
There is an exception: loans of $10,000 or less generally are not subject to these imputed-interest rules, as long as the money is not used to buy income-producing assets. For anything larger, look up the current month's AFR before you set your rate.
Do Not Charge Too Much: State Usury Caps
Every state sets a maximum legal interest rate for personal loans, called the usury limit. Charging above it can make the interest, and sometimes the whole loan, unenforceable, and may expose you to penalties.
These caps vary a lot. As of June 2026, some states set a general usury limit around 10% to 12%, while others allow higher rates or set different caps depending on the loan size and type. Banks are often exempt from these caps under special rules, but a private individual lending to a friend usually is not.
Because the rules differ so much by state, check your own state's current usury law before finalizing a rate. When in doubt, staying in the single digits to low teens is a safe zone in most states.
A Reasonable Range for a Private Loan
Putting it together, a fair private loan rate often lands between the IRS minimum (the AFR) on the low end and well under your state usury cap on the high end.
For many family or friend loans, a rate in the low single digits to high single digits is both legal and reasonable. It clears the IRS imputed-interest hurdle while staying friendly and well below usury limits.
The right number depends on the loan amount, the term, the borrower's situation, and your relationship. There is no single correct rate, only a legal range and a fairness judgment.
Put It in Writing
Whatever rate you choose, document it. A simple written promissory note should list the principal, the interest rate, the payment schedule, and what happens if a payment is late.
A written agreement protects both sides, keeps the loan looking like a loan to the IRS, and reduces the chance of a misunderstanding hurting the relationship. You can find promissory note templates online or have a local attorney review one.
This article is educational and not legal, tax, or financial advice. Tax rules and usury laws are state-specific and change, so confirm the current AFR and your state's cap with the IRS and a qualified professional.
When a Formal Lender May Be the Better Move
Sometimes the kindest answer is not to be the lender at all. Lending to people you care about can strain relationships if payments stop, and you have no easy way to enforce repayment.
If the borrower has weaker credit, they may still qualify on their own by pledging a car as collateral for a secured loan. Either way, pointing them toward a regulated lender, whether they apply for a loan online or in person, keeps your relationship out of the math. Upstart looks at more than credit scores and can serve borrowers who need a personal loan with bad credit, with fixed-rate personal loans.
Upstart
Upstart
Upstart is an online lending marketplace that partners with banks to provide personal loans from $1,000-$75,000. Upstart goes beyond traditional lending metrics to help you find financing that considers many factors including your education and experience
Standout feature
AI-driven underwriting that goes beyond your credit score — checking your rate is a soft pull with no score impact, most applicants are approved instantly, and funds can arrive as soon as the next business day.
Fees
Origination fee 0%–12% of the loan amount
Pros
No minimum credit score required (AI-based approval)
Cons
Origination fee: up to 12%
Another option for a borrower who would rather compare lenders than ask you is a marketplace. MoneyLion matches borrowers with multiple lender offers in one search, so they can see several rates from a single application.
MoneyLion
MoneyLion
Compare personal loan offers from top providers in minutes with no credit score impact with the MoneyLion Marketplace.
Standout feature
Soft-pull marketplace that surfaces prequalified personal loan offers from a network of lenders, with options up to $100,000 and partners that work with fair and bad credit
Fees
Free to use the marketplace
Pros
Compare multiple lender offers in minutes; soft credit pull to prequalify — no impact on your score
Cons
Final approval requires a hard pull from the chosen lender
For borrowers who want to compare several options quickly, EzLoan and similar marketplaces can surface offers, including personal loans for bad credit, based on the borrower's profile. Rates and approval depend on creditworthiness, and terms and conditions apply.
Frequently Asked Questions
Is it legal to charge interest on a personal loan to a friend?
Yes, charging interest on a private loan is legal in every state, as long as your rate stays at or below your state's usury cap. The rules differ by state, so confirm your local limit before setting a rate.
What is the minimum interest I should charge?
For loans larger than $10,000, the IRS expects you to charge at least the Applicable Federal Rate (AFR) for that month, or the forgone interest may be treated as a gift or imputed income. Loans of $10,000 or less are generally exempt if the money is not used to earn income.
What is the maximum interest I can charge?
Your state's usury law sets the ceiling. Caps vary widely, with some states around 10% to 12% and others higher, so check your state's current limit before charging anything in the double digits.
Should I really put a family loan in writing?
Yes. A written promissory note that lists the amount, rate, and repayment schedule protects both parties, helps the IRS see it as a genuine loan, and lowers the risk of a disagreement damaging the relationship.
