AFR (Applicable Federal Rate)

In depth

The IRS publishes short-term, mid-term, and long-term AFRs each month based on Treasury yields. The applicable rate depends on the loan term: under 3 years uses short-term, 3 to 9 years uses mid-term, and over 9 years uses long-term AFR. Compounding can be annual, semi-annual, quarterly, or monthly. Misconception: AFR is not the prevailing market rate; it is typically below market, making it a friendly minimum threshold. Practically, all seller-financed transactions should state at least the AFR to avoid imputed interest. Sellers usually charge well above AFR to reflect actual risk, but the IRS minimum still matters for OID and Section 483 calculations. Bookmark the IRS AFR page, and have a CPA confirm the rate at the time of contract execution.