The catch: I guess the parties can settle what may be convenient for them. They have freedom to do what they desire, whether to charge interest or not.

The IRS will usually ignore loans of $10,000 or less, as long as the money isn't used to buy income-producing securities. Also, you can usually lend an unlimited amount without interest, as long as its paid back in a year or less.

Problems occur when loans terms exceed $10,000 and 1 yr. You always run the risk that if you don't charge interest, the IRS may calculate an "imputed interest rate" for the transaction. The IRS will expect you to pay taxes on this "phantom interest income", even if never received any interest from the loan. The "imputed interest rate" is based on what it costs the government to borrow and is recalculated every month.

The exception is where your loan is $100,000 or less, and the borrower's investment income the year of the loan is $1,000 or less, the IRS won't tax you on the imputed interest. If the borrower's investment income exceeds $1,000, your imputed interest is limited to the amount of investment income. So, for example, if you give your son $50,000, and he earns $1,500 from bonds and stock dividends, your imputed interest will be $1,500.

To avoid phantom interest income you can always charge a low interest rate and document the loan.