David, you appear to have a "gift loan". The rate applied is the short term applicable federal rate at the time the loan is made. The loan is recalculated semi-annually. There is a Rev Rul 86-17 which describes a blended rate to be used for demand loans, which would included your gift loan, that are outstanding for the whole year.

With gift loans the first $10,000 in debt is excluded under the de minimus rules. If it is between $10,000 and $100,000 then the inputed interest for income tax purposes is limited to investment income in excess of $1,000. But this does not apply for gift tax purposes, therefore you still need to consider the inputed interest as a gift from the lender to the borrower. If it is over $100,000 then these exceptions don't apply and the inputed interest rules apply.

I would refer you to Internal Revenue Code Section 7872 for a more throuogh discussion of these rules.