How to Lend Money to Family and Friends

Take the necessary precautions to preserve the relationship.

Someone writing a check.
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Maintain some boundaries. Just because you're lending a friend or family member money doesn't entitle you to micromanage how they use it, nor does it mean you have co-ownership of what they're buying. "The lender should have no expectations," Marks says. "They should not feel like that it entitles them to use the car or visit the house."

Marks adds, "You have to step back and say, 'I'm just the bank.' If you're going to be the bank, keep your opinions to yourself."

Protect other family members. If you're loaning money to one of your children, consider adding a line to the agreement about what would happen if you were to die. Beth Pearson, a director of marketing for a law firm in Pittsburgh, borrowed money from her mother when she wanted to buy a house. The loan stipulated that in the event her mother died before the loan was paid back, Pearson would have to pay the money back to the estate or she'd receive a lower amount of inheritance. "I have four siblings, so our loan agreement was designed to protect them from me getting more than my share of the inheritance if my mother had died," she says. Doing so helps to prevent any bad blood between your children.

Be proactive if the borrower falters. If the borrower can't repay you on time, work with him or her to develop a new repayment plan, advise Jeanne Fleming and Leonard Schwarz, who write Money Manners, a weekly advice column syndicated by King Features, and co-authors of Isn't It Their Turn to Pick Up the Check? "Don't take 'I'm really sorry but I don't have the money,' for an answer—not if you want your money," Fleming says. "Be sympathetic, but firm."

Schwarz adds: "It's important to get the person who owes you the money recommitted to repaying you. Otherwise, it's far too easy for the borrower to feel, initially, that the loan is of no importance, and, as time goes by, that it's been more or less forgiven."

Loaning money to loved ones comes with risk, but you can minimize that risk by taking the right precautions. That's what Marks did, and it enabled her friend to pay off the loan without any major hiccups.

Twitter: @danielbortz