• Make sure the loan won’t damage your relationship with that person. Loaning money can put significant stress on a relationship. You may feel uncomfortable asking about missed payments. They may expect you to be more lenient about enforcing repayment terms if problems arise. And, if they get in a situation where they can’t repay the loan, misunderstandings and resentment can occur on both sides.

• Put the arrangement in writing. If you decide to loan the money, put all the terms in writing, including the principal balance, interest rate, repayment terms, due dates, and provisions for late payments. You may even want to have a lawyer draw up a formal agreement for significant amounts. With a formal repayment schedule, you may feel more comfortable asking about repayments if the person falls behind.

• Exercise caution before cosigning a loan. When you cosign a loan, you sign a legal document accepting responsibility for the entire debt. If the primary borrower falls behind in payments, the creditor can come to you immediately looking for payment. The debt will be listed on your credit report, which may impact your ability to obtain another loan. If the primary borrower pays late, that payment history is likely to appear on your credit report.

• Ask for collateral. Don’t be afraid to ask for a lien on a house or car if you are loaning significant sums. That way, if the person files bankruptcy, your claim will have precedence over general creditors without liens.

• Don’t keep the loan a secret. If you make a loan to a family member, inform other close family members of the loan and the repayment terms, so they don’t feel you are giving preferential treatment to the person who received the loan.

Finally, if you decide to formalize your loan to your relatives and/or friends,consider using an interpersonal loan company such as CircleLending. An interpersonal loan company will be able to help set-up and then manage your loan by: formally and legally documenting the loan; securing the loan with real estate or other property, if needed; processing payments; and
reporting on the loan with monthly and annual statements.