How to Lend Money to Family and Friends

Here's a tough one: Would you – should you – lend money to a family member or friend in need? During these tough economic times, we parents are often asked to be "bankers" for a loan to a family member who may need some bucks to get through a period of unemployment, or maybe to make a down payment on a home.

Although your first reaction when asked for money may be to rush for your checkbook, please listen to us for a minute:

DON'T LET YOUR HEART OVERRULE GOOD SENSE. Get some necessary protection.

Hey Dolans, lighten up. This is my family - I have to help.

OK. We're not saying don't lend the money, but we are saying consider what you are doing before you make the final decision. We've lost count of how many of our radio listeners have called and related tales of family loans gone very bad!

Lending money is a touchy subject. So you need to be honest with yourself and your family member. In some cases, everyone might be better off if you simply view the transaction as a gift. If you don't really expect or even want to be repaid, call it a gift and everyone will feel better. No misunderstandings, no disappointments. (Remember, parents can gift up to $24,000 - $12,000 a piece - to their children or anyone each year with no tax repercussions.)

Before You Write That Check…

On the other hand, let's suppose this really is a loan. OK, we can handle this without hurting anyone's feelings or damaging any relationships … if we proceed sensibly.

For starters, ask yourself a few tough questions:

• Can you afford to lose the money if the loan is not repaid?
• Can you afford to suffer loss of income because that money is not invested?
• Is the borrower realistically able to repay the loan in a reasonable period of time?
• Have you lent money to this friend or relative before – and has it been repaid?
• Does the borrower have a specific plan on how to use the money? Is there a business plan you can read over, a home you can look at, a household budget you can review?

Asking these questions will help both you and the borrower. By making sure that you can afford to lend the money without resentment and by asking the borrower to plan ahead for reasonable repayment, you're much more likely to avoid disputes and disappointments later on.

Next: Keeping the IRS Off Your Back