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Borrowing from family can be a low-cost option if you need money for a down payment on a home, to start a business or repay high-interest debts. It can also be a convenient way to get quick cash if you lose your job or encounter an emergency expense.
But mixing money and family is tricky.
Defaulting on a family loan could put your relationship with the lender at risk and add strain to your family member’s finances. For both the borrower and lender, a successful family loan requires clear communication and maybe even a written agreement.
Here’s what to know about getting a personal loan from a family member, including the tax implications and how to create a family loan agreement.
What is a family loan?
A family loan is a loan between family members. You could create a similar loan arrangement between friends, significant others or roommates.
With this type of loan, it’s up to you and the lender to decide how it’s structured. A family loan can have interest or not. You can repay it in installments or a lump sum. It can be unsecured, or you could provide collateral. The loan can be informal or formalized with a loan agreement.
Family loans can help you avoid expensive borrowing options, including high-interest loans that can lead to more debt. Plus, there aren’t many barriers to approval, like credit score or income requirements. However, the potential downsides include tax implications and perhaps a bit of awkwardness when you make the ask.
What are the tax implications of a family loan?
If the loan is under $10,000, there may not be any tax implications as long as the money isn’t used to produce income. For family loans that are $10,000 or more, the IRS may expect the lender to charge interest and report those interest payments as income on their tax return.
That interest rate should be at least equal to the applicable federal rate, which the IRS sets monthly and varies depending on the length of the loan .
If your lender doesn't charge interest or if the rate is lower than the applicable federal rate, the IRS might consider the amount of interest they should have received as a gift, though some exceptions may apply. The lender could be required to file a gift tax return if that gift is over a certain amount ($19,000 in 2025 and 2026) .
Pros and cons of family loans
Pros
- Easy approval: There's typically no formal application process, credit check or income verification when you're borrowing from family or friends. Traditional lenders often require documents such as W-2s, pay stubs and tax forms as part of the loan application.
- Low costs: Since the loan is coming from a loved one instead of a for-profit corporation, you may get a loan at a much lower interest rate than what a bank, credit union or online lender might offer. Family members may also be unlikely to charge late fees or the upfront origination fee that lenders sometimes charge.
- Hardship options: Family members may be more lenient than other lenders if you encounter a hardship, like a job loss or illness, letting you pause or suspend payments for a period of time.
- Helps avoid risky loans: Family loans can help you avoid payday and other high-interest lenders that charge unaffordable rates.
Cons
- Potential for conflict: If the loan isn't repaid or the terms of the agreement are broken, it can strain a relationship. The family member or friend loaning the money must consider the chances of not getting it back and whether the loan will impact their own financial goals.
- Tax implications: As detailed above, if the loan is $10,000 or more, the lender may need to charge interest and report that interest on their income tax return. For large loans, the lender may need to file a gift tax return.
- No credit building: Payments toward a family loan aren't reported to the three major credit bureaus, eliminating the opportunity to improve the borrower’s credit history.
🤓 Nerdy Tip
A lending circle can be a credit-building alternative to family loans. Lending circles are groups of trusted friends, family members or neighbors who collectively save money and take turns lending those funds out to each group member. Mission Action Fund is a nonprofit organization that helps people form lending circles and reports payments on lending circle loans to the credit bureaus. How to make a family loan agreement
Formalize a family loan with a loan agreement to avoid issues that may arise during repayment. A family loan agreement is a contract that spells out the terms and conditions of the loan.
A notarized and signed agreement may seem impersonal, but having the details in writing can prevent misunderstandings and frustrations. Be sure to include both parties in the decision-making process.
Here’s what to include in your family loan agreement:
- The amount borrowed and how it will be used.
- Repayment terms, including payment amounts, frequency and when the loan will be repaid in full.
- The loan’s interest rate, if applicable.
- If the loan can be repaid early without penalty, and how much interest will be saved by early repayment.
- What happens if the borrower stops paying, whether it’s temporarily due to an emergency, or entirely.
A tip for the borrower: Help your lender by being clear about how much you need to borrow, what it’s for and the repayment plan when you approach them about borrowing. Be open to any questions your family member may have about your ability to repay the loan. Give your family member time to process the request.
A tip for the lender: Consider whether you can afford to offer a loan and the possibility of taking a loss if there are issues with repayment.
Alternatives to family loans
When weighing the pros and cons of a family loan, also consider alternatives that may provide more cash or less risk to your relationships.
Personal loans
You can apply for a personal loan from a bank, credit union or online lender. With a personal loan, you get a lump sum of money and repay it in monthly installments over a period that typically ranges from two to seven years. Personal loans can be used for nearly any purpose, including debt consolidation or home improvements.
Personal loan rates range from 7% to 36%, with the lowest rates reserved for borrowers with good to excellent credit (scores in the mid-600s or higher). Some lenders, like online lenders and credit unions, offer loans to borrowers with low credit scores (scores from 300 to the low 600s).
Bad-credit loans can have rates at the high end of a lender's APR range, but they're often much more affordable than payday and other no-credit-check loans.
Co-signed personal loans
Some lenders allow you to add a family member or significant other as a co-signer to a loan application. Doing so can increase your chances of qualifying. It can also put less pressure on your loved one, since they’re not providing the cash.
However, there’s still a risk of damaging your relationship. Failure to repay a co-signed loan can hurt both of your credit scores. A co-signer must repay the loan if the borrower can’t.
Cash advance apps
Cash advance apps let you borrow up to a few hundred dollars and repay the money on your next payday. These apps don’t charge interest, but they may charge subscription fees and fast funding fees — and they often ask for an optional tip. If you use an app, make a plan to pay the advance back on time.
A “buy now, pay later” loan is an at-checkout financing option that splits the bill from one shopping trip into multiple (usually four) smaller payments. These payment plans are available at major retailers and are best for large purchases like a new mattress or laptop.
Buy now, pay later
Use one payment plan at a time to avoid overspending or losing track of payment due dates.
Gifting
If both parties agree that a loan doesn't need to be repaid, it’s considered a gift. This may be a choice when there's concern that a loan might put the relationship at risk, and if the family member can afford to give the money away without being repaid.
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- 1. IRS. Applicable federal rates (AFRs) rulings. Accessed Jan 21, 2026.
- 2. IRS. IRS releases tax inflation adjustments for tax year 2026.... Accessed Jan 21, 2026.
