“Is the word ‘Fae’ offensive?” The sort answer is No. No, it is not.
There is a strange debate on if the term fae would be considered a slur to the entities this term is in regard to. The Internet, in its “infinite wisdom” collectively decided that fae is incorrect because it is “new” and then someone made the logic-leap that the entities it refers to would find the term offensive, or slur-like. I have it on good authority that they would not find it offensive. Think of all the mischief that would mysteriously befall many works of fantasy literature if this was the case. It is true that the etymology of fae and fairy are from French and in turn from Latin meaning Fates however the usage of Fae by other cultures has a bit of a twisting, Labyrinthine, history. These beings, in Norse lore, were known as Alfir, Alfie, or Alfr and from this we get the word “elf.” In Gaelic lore these entities were called the sidhe (pronounced as “She”). The Banshee comes from the Gaelic Bean Sidhe (Woman fairy). However not all female faeries are the banshee. You may notice there’s an overlap with ghost stories and faery lore in old folk legends. The reason for this is in some lore a human or a human’s ghost could become a faery. The banshee was usually, formerly, a deceased mortal woman. Washington Irving even referred to The Headless Horseman, in his Legend of Sleepy Hollow, as a goblin. This may come from the Irish having a specific term for the souls of men who lost their heads in battle becoming a type of dangerous faerie known as a Dullahan. Despite The Legend of Sleepy Hollow being set in a Dutch New York colony, I can’t help but think there was some Irish influence here. Faeries are not always the tiny pixies like Tinkerbell. You get powerful and sometimes harmful beings like the Dullahan (headless Horsemen), Red Caps (Goblin-like creatures that soak their caps in the blood of those those kill), goblins, trolls, The Erlking, and many scary entities – some of which literally feed on fear. For this reason the Irish, Welsh, Scottish, and English were afraid to offend them. And they came up with euphemisms like The Good Neighbors, The Beautiful People, and The Fair Folk. When the word Fairy came to the English language it was tied to The Beautiful People euphemism and evolved into “The Fair Folk” before reverting back to Fairy, Faery (Older speller), and Fae. A winding path but the word found two passages into modern language. So no, these entities would probably not find the word fae offensive, especially if those using it are using it with the intention of flattery like with “Fair folk.” It’s similar to how The Greeks sometimes called The Furies (Erinyes) is The Kindly Ones, because you want them to act kindly. Calling the faeries by The Beautiful People or Fair Folk was to flatter them into not doing harm. And calling them The Good Neighbors was in the hope that they would behave as such. In works of fiction actual slurs for these sort of beings include “knife ears’ and in the now canceled TV show, Carnival Row, the word Critch, which is derived from “Creature” and sounds a little like a certain B word. Side Note: Count Dracula in Bram Stoker’s novel was supposed to have pointed ears. Imagine how he would react to a slur targeting his anatomy like that. You probably would not survive the night. Now, what you probably should worry about is how virtually identical powerful entities exist in cultures all over Europe and parts of North America. Immortal or near-immortal entities that might pass for human but not quite. My own sources – The book Dark Faeries by Dr. Robert Curran, as well as many works of fantasy literature and folklore. Image by Brian Froud from the book Good Faeries / Bad Faeries.

