The Bank of Mom and Pop: The Benefits Afforded by Intrafamily Lending
Sometimes skipping the costs and hassles of commercial bank loans can make perfect sense, saving the borrower some money and helping the lender with their estate planning goals.


She’s done all the right things: She’s worked hard in school, earned an advanced degree and has laid the groundwork toward finding a job in a well-paying career. Impressive as this recent graduate’s successes are, banks aren’t in the habit of giving mortgages to the unemployed.
So why not remove the bank from the equation?
A popular workaround when someone without enough cash on hand is looking to make a major purchase is an intrafamily loan, where a parent or other family member lends money in a formally structured agreement. These types of loans come without the hurdles of those offered by a bank, and there can be other tangible benefits as well, including lower interest rates, versatile payment options and estate planning opportunities related to how the loan is structured.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
These benefits come with the common drawbacks inherent to lending money — no matter how closely related the parties are, there is always an element of risk — but a well-rounded understanding of intrafamily lending can potentially provide significant upside for both parties. And oftentimes, intrafamily loans can make sense even when the recipient has a job that pays well or another source of income.
Just helping out
The types of loans implemented in intrafamily lending don’t necessarily have to be in the family. In fact, anyone can lend to anyone, any amount, for any number of reasons, from an aunt helping a niece secure a new vehicle, to a friend helping another with capital to help start a business, to a grandparent establishing a trust to provide for a grandchild while moving assets outside their taxable estate.
Smaller loans don’t necessarily have to be structured the way a regular bank loan is. If the amount is small enough — say, $10,000 from a parent to help pay off a child’s vehicle — the lender can simply transfer the funds and allow them to be qualified as a gift. Because the amount is below the $15,000 gift tax exclusion threshold for individuals ($30,000 for married couples) there would be no associated gift tax due, assuming that total gifts for the year do not exceed the annual exclusion.
Carrying the full load
A common, and more complicated, form of intrafamily lending is a mortgage. Let’s say our overachieving-yet-cash-strapped grad wants to buy a $300,000 home. Unless she has already landed a good job and squirreled away enough savings for the down payment, the bank isn’t likely to be interested in lending to her. But if her parents have the means, they can loan the child a portion of the mortgage, or the entire mortgage amount. With the guidance of their financial adviser and an attorney, the parents can construct a home loan with advantageous terms for their family — one with no money down, no pre-approval, no credit check and no background check. The child is just getting a loan from the “Bank of Mom and Pop.”
Perhaps the best part of this arrangement is that the interest payments stay in the family and will likely come back to the borrower one day as part of their inheritance. But in the short-term, the interest rate they will be paying will not only be lower than those on mortgages from commercial banks — it will be the lowest rate allowed by the IRS. As of July 2019, the compound annual applicable federal rate (AFR) is 2.13% for a short-term period (three years or less), 2.08% for mid-term loans (more than three years on up to nine years), or 2.50% for a longer term (more than nine years).
Crafting loans
When drawing up a loan with your attorney, there are several key considerations and procedural steps to take. If the loan is a mortgage, the lender needs to create a promissory note and file the mortgage within their county to make it official. In this, intrafamily mortgages are different than other types of loans.
Two of the most important factors when designing the loan is making sure it stays distinct from a gift. Lenders can do this by establishing it with an interest rate based on the current AFR and setting up an appropriate payment structure. Failure to do so may bring scrutiny from the IRS, leading to a potential penalty or a gift tax being imposed. And, just to be clear, the gift tax would be owed by the person who gave the gift, not the one who received it.
Tips on structuring the loan: I typically recommend to my clients that they make their mortgages interest-only, with a balloon payment scheduled for the end of the loan’s term. If at the end of the loan the lender wishes to refinance, they of course have the option to do so. Likewise, if the recipient is unable to keep the payment schedule, the lender may decide to forgive the interest at the end of each year. Again, the lender could use their annual gift tax exclusion to forgive the required payment without money being exchanged and the IRS would consider the payment “made.”
It’s worth noting that for a loan recipient to pay down the principal, they are really just shifting cash back to the lender’s estate, and they probably don’t need the money if they’ve just lent the child hundreds of thousands of dollars. Another way to look at is it that the recipient of the loan is also likely going to inherit a portion of the lender’s estate. So, they might they ask themselves, who will benefit more from the incremental cash they would apply to principal, the younger version of themselves just starting out, or the future version, who is more established in their career and is a beneficiary of the lender’s estate?
Intrafamily loans can provide families a simplified way to make complex purchases, with more flexibility and favorable terms compared with what they would get from a traditional bank. The key to making such a solution work is to align the structure of the loan with the financial means and goals of both parties, and to manage the note and all related payments and documentation in accordance with regulatory requirements.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Casey Robinson is the Managing Director of Wealth Planning at Waldron Private Wealth, a boutique wealth management firm located just outside Pittsburgh. He focuses on simplifying the complexities of wealth for a select group of individuals, families and family offices. Robinson has extensive experience assisting multi-generational families with estate planning strategies, integrating trusts, tax planning and risk management.
-
Stock Market Today: Stocks Soar on China Trade Talk Hopes
Treasury Secretary Bessent said current U.S.-China trade relations are unsustainable and signaled hopes for negotiations.
By Karee Venema
-
2026 Disney Dining Plan Returns: Free Dining for Kids & Resort Benefits
Plan your 2026 Walt Disney World vacation now. Learn about the returning Disney Dining Plan, how kids aged three to nine eat free, and the exclusive benefits of staying at a Disney Resort hotel.
By Carla Ayers
-
SRI Redefined: Going Beyond Socially Responsible Investing
Now that climate change has progressed to a changed climate, sustainable investing needs to evolve to address new demands of resilience and innovation.
By Peter Krull, CSRIC®
-
Here's When a Lack of Credit Card Debt Can Cause You Problems
Usually, getting a new credit card can be difficult if you have too much card debt, but this bank customer ran into an issue because he had no debt at all.
By H. Dennis Beaver, Esq.
-
Going to College? How to Navigate the Financial Planning
College decisions this year seem even more complex than usual, including determining whether a school is a 'financial fit.' Here's how to find your way.
By Chris Ebeling
-
Financial Steps After a Loved One's Alzheimer's Diagnosis
It's important to move fast on legal safeguards, estate planning and more while your loved one still has the capacity to make decisions.
By Thomas C. West, CLU®, ChFC®, AIF®
-
How Soon Can You Walk Away After Selling Your Business?
You may earn more money from the sale of your business if you stay to help with the transition to new management. The question is, do you need to?
By Evan T. Beach, CFP®, AWMA®
-
Two Don'ts and Four Dos During Trump's Trade War
The financial rules have changed now that tariffs have disrupted the markets and created economic uncertainty. What can you do? (And what shouldn't you do?)
By Maggie Kulyk, CRPC®, CSRIC™
-
I'm Single, With No Kids: Why Do I Need an Estate Plan?
Unless you have a plan in place, guess who might be making all the decisions about your prized possessions, or even your health care: a court.
By Cynthia Pruemm, Investment Adviser Representative
-
Most Investors Aren't as Diversified as They Think: Are You?
You could be facing a surprisingly dangerous amount of concentration risk without realizing it. Fixing that problem starts with knowing exactly what you own.
By Scott Noble, CPA/PFS