Intrafamily loans can be a powerful tool for supporting loved ones while keeping wealth within the family. These private lending arrangements offer potential benefits such as cost savings, estate planning advantages, and flexible terms. But while the opportunities are significant, they also come with important risks and relational dynamics to consider. This article explores how intrafamily loans work, what to think about before offering or requesting one, and how to structure them to protect both your finances and your family relationships.
What is an Intrafamily Loan?
An intrafamily loan is a strategic tool that can offer cost savings, ease of access to credit, and the opportunity to keep wealth within the family. One family member acts as the lender and another member as the borrower. The lender provides financial assistance and earns interest, while the borrower gains access to funds, often on more favorable terms than a traditional bank. The interest paid stays within the family, rather than contributing to the profits of a commercial lender.
Why Are Intrafamily Loans Popular Today?
Intrafamily loans gained favor as borrowing costs increased in recent years, with the average 30-year fixed mortgage rate going from 3.15% in 2021 to 5.53% in 2022, and near 7.00% at present1. To avoid unintended tax consequences, most intrafamily loans should charge at least the AFR (Applicable Federal Rate) set by the IRS each month. Intrafamily loans remain popular as there is a significant difference between traditional mortgage rates and the AFR (4.00% for short-term loans and 4.77% for long-term loans as of June 2025).
Affluent families can also realize estate planning and multi-generational wealth transfer benefits from intrafamily loans. By allowing younger family members to acquire assets — such as homes, businesses, or investments — on favorable terms, parents or grandparents can help build the next generation’s financial foundation. At the same time, any future appreciation on the purchased assets accrues outside the lender’s estate.
Should I Provide My Family A Loan?
Not everyone is in the financial position to be the family bank. To be comfortable as a lender, you should be sure your overall financial plan can facilitate the loan. Do you have the liquidity? Is the opportunity cost acceptable? And perhaps the most uncomfortable question within the family – is your borrower responsible?
Questions like these may not cause much anxiety if the loan is relatively small or over a short period of time. The risks are lower and the decision to help may be simple. But for large sums and longer time frames, it is more important to have clear terms and contingencies thought out. For example, what if the family member paying the loan back was let go from a job, or was disabled and couldn’t work? Similar to bank underwriting, a family lender should evaluate the risks and potential consequences.
How Can I Ask My Family for a Loan?
As the borrower, one could help by sharing the benefits of using the family loan compared to other options and having a clear plan for repayment. The more risks associated with how you are using the loan, or how you are paying it back, the more you should be prepared. After all, this is a loan, not a gift, and all parties should be clear on that point. A loan can successfully turn into a gift as part of a well thought out plan. But if a borrower is expecting relief via a gift and never gets one, that can sour even a tight family relationship.
Can I Turn My Loan into a Gift?
Over time, lenders may choose to forgive portions of the loan, using the annual gift tax exclusion (currently $19,000 per recipient for 2025; indexed for inflation). By strategically forgiving principal in increments, families can gradually transfer wealth, without triggering taxable gifts — all while retaining flexibility and control during the process. It is important to remember that if the forgiven amount exceeds the annual gift tax exclusion, or if additional gifts have been made to the borrower from the lender that in addition to the forgiveness amount exceed the gift tax exclusion, it could necessitate filing a gift tax return. This does not necessarily mean that any tax would be due, but it will reduce the lender’s lifetime exemption.
Think an Intrafamily Loan is Right for Your Family?
Intrafamily loans can assist family members and be used as an estate planning tool to pass on assets, but if not executed properly there are some financial and relational pitfalls to be wary of. It is wise to discuss your plans – as a lender or a borrower – with your wealth management team and bring in other professional advisors as needed. Intrafamily loans won’t be the solution to every borrowing need, but they have benefits worth considering, especially as traditional borrowing becomes more difficult.
