Dear Karen: We have three kids: one married, one single, and one still in college. The married one and her husband recently asked us for a loan to help with the down payment for a house. They are very responsible and I have no doubt we’d be paid back. But my husband is worried about setting a precedent. In particular, if our “baby” found out, he’d be asking for parity the next day, and we might never see the cash again. What do you suggest?  --The Bank

Dear Bank: You could fall back on Shakespeare’s Hamlet: “Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.”

Loaning money can be fraught with unintended consequences. Nevertheless, if approached carefully it has the potential to be a joy to both the lender and the borrower. Here are some factors to consider when deciding whether to lend money, abridged from the National Foundation on Credit Counseling and WikiHow:

• Don’t risk more than you can afford to lose. If your relationship and finances can survive even if you’re not repaid, you can afford to make the loan.
• Don’t dip into your retirement account. Your retirement accounts are not discretionary funds, but your ticket to independence in your old age. Don’t risk it.
• Discuss it with your partner. Money can be a significant stressor in relationships. She might see the situation differently and think of scenarios that haven’t occurred to you.
• Evaluate the impact the loan will have on the rest of the family. Strive for fair, not equal treatment. A precedent doesn’t mean you “owe” the others.
• Consider the reason the borrower needs the money. If you want to be repaid, you have to believe that is a reasonable expectation. If you want them to be free to spend funds as they wish, make it a gift.
• Don’t make judgments on the borrower's spending decisions. Inquiring about their plans to get back on track with late payments is justified, but resist the urge to grill them over where the money has gone.
• Don't be an enabler. If the would-be borrower is not responsible with money, consider paying for professional financial counseling for him/her instead of a gift or loan.
• Treat the loan as a business arrangement.
• Put all the terms in writing, using forms available online such as the Internet Legal Research Group at www.ilrg.com/forms/promisry.html. Consider having the documents notarized, as this will give you more legal standing if the borrower defaults.
• Agree on all terms, and figure out monthly payments using a loan calculator, such as the one available at www.bankrate.com.
• Consider what legal steps you would be willing to take to collect an unpaid loan. Jointly reviewing a worst-case scenario in advance of the situation can help preserve a relationship if the worst happens.
• Consider requiring collateral for large loans. If you are lending money for a car, be listed as the lien holder on the title. In collateral cases, you probably need an attorney.
• Avoid co-signing a loan. A co-signer agrees to repay the loan even if the lender defaults. You may not be notified until the loan is several months delinquent, affecting your credit as well as the primary borrower’s credit.
• Check on possible tax and estate consequences. What happens if one of the parties dies during the loan term? On loans over a certain amount, interest rate is implied and the phantom income must be reported on your tax form. If the borrower defaults on the loan, document your attempts at collection so you can write off the loan.

I still remember my husband asking his stepfather for a home down-payment loan 35 years ago. His stepdad was reluctant, there being three more boys to follow, and we didn’t relish being in his debt. But he made the loan. We scrimped and paid if off in half the time required by the repayment agreement.

Some years later, friends asked us for a loan, and we reluctantly refused. The amount would have been a significant chunk of our savings, and we were afraid that failure to repay would have additionally cost us our friendship. Indeed, we are still friends with both of them 25 years later. Given what we know now about their situation then, I believe the gift would have been “enabling.”

Bottom line, the details are important. If you follow your heart and your mind, you can lend wisely and give joyfully.

Karen Telleen-Lawton is grateful to serve seniors  and pre-seniors as the Principal of Decisive Path Fee-Only Financial Advisory in Santa Barbara, California (http://www.DecisivePath.com). You can reach her with your financial planning questions or Gratitudes comments at  This email address is being protected from spambots. You need JavaScript enabled to view it. .

Meet Karen