Is this interest income that you received?
What is your total taxable income and filing status?
Interest is taxed at regular tax rates. The tax on interest income will depend on your overall tax bracket.
In order to avoid this in future, you might want to give the loan amount as a gift to the person so that you do not receive any interest.
Normally a person can give up to the annual exclusion amount $12000 for 2007 to a person, every year ($ 24000 in 2007 if spouses joins in for the gift) without facing any gift taxes and note that such amounts do not count as part of your $1,000,000 lifetime total.
Further, IRS allows a person to give up to $1,000,000 in gifts, total, in their lifetime, before they start owing the gift tax. (This gift is not per (done) person but it’s a per donor limit). So you can make gifts that are worth up to a million bucks during your lifetime without paying the gift tax. . Even if you do not owe a gift tax because you have not reached the $1,000,000 limit, you are still required to file gift tax return if you made a gift that does not qualify as excludable.