What type of loan is payable at a rate below the applicable federal rate?

A loan that is payable at a rate below the applicable federal rate is classified as a below-market loan. Below-market loans typically involve interest rates that are significantly lower than the federal benchmark rates set by the IRS. This type of loan can lead to certain tax implications, primarily concerning the treatment of imputed interest, where the IRS may require a borrowing party to recognize interest income as it pertains to the difference between the interest charged and the applicable federal rate.

Understanding below-market loans is critical, particularly for tax reporting, as they necessitate recognizing that the effective lower rate may result in the lender being deemed to have provided benefit to the borrower, leading to possible tax consequences on both sides of the transaction.

The other types of loans mentioned do not specifically address the rate in relation to the applicable federal rate. Demand loans allow the lender to demand repayment at any time but are not defined by their rates concerning federal benchmarks. Term loans involve borrowing for a specific period with set repayment schedules, while qualified mortgages refer to loans that meet certain criteria for borrower protection and affordability, rather than their interest rates concerning federal law.