It’s no secret. When people get into financial trouble, they often turn to their families for help. It is much easier to get a loan from someone you know and love than from a bank. While occasional family loans are fine, frequent ones can lead to big trouble, for everyone involved. Financial experts generally advise families not to loan money to each other. This is often easier said than done, however. If you have been asked for a loan recently, proceed with caution and follow these tips.

Find out what the loan is for. You don’t want to lend a relative a large sum of money, only to discover they paid off a small debt and spent the rest on the vacation of a lifetime. Make certain the loan will be put to good use, whether to pay down debt, finish a degree, start a business or for some other reason.

Determine how much you can afford to give. Review your finances to see how much you can realistically lend. If you cannot give any, be honest and offer to help out your relative in some other way. Perhaps you could watch their children while they work part time in the evenings. Do not go to extreme measures to find the money or overextend yourself. Give what you can, and if it isn’t enough, so be it. There’s always a chance you will not be repaid and you don’t want to put yourself into jeopardy.

Draw up a contract for the loan to be repaid. Don’t throw caution to the wind and tell your relative to pay you back whenever. Chances are they won’t. You’re loaning them your hard-earned money, so arrange for it to be repaid in a timely fashion, perhaps even with interest. Depending upon the terms of the loan and how you go about it, there might be some tax implications. Speak to a tax professional to ensure the right contract between parties. For the best results, you might want to have a third party draw up the contract and arrange for the payments to be deducted from your relative’s bank account automatically.

Loans can be tough, particularly among families. Because you’re family, you may feel obligated to help out. If you can afford to do so and you set the right terms, the loan can work out well for everyone involved. If you don’t, there could be tension around the dinner table for some time to come. Lend money to family wisely!

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