Risks and rewards of loans between friends
By Pat Curry • Bankrate.com

It had been a bad week for Bonnie Russell.

First, she went out to dinner with her boyfriend, who told her he was having problems with his daughter and didn't have time for a relationship.

Then, within days, the Web company owner discovered that she had been "ripped off by a Web guy." She needed $3,000 to pay another Web guy to fix her site, 1st-pick.com. There was no time to go through a bank. She called her ex to see if he would loan it to her.

"I said, 'You want to be friends, here's your chance to prove it,'" she says. "I got the money."

She got it, she says, in part because she insisted that the terms be set down in writing, that it be paid back quickly, and be paid with interest. The agreement said she had six months -- she paid it back in three, she says.

"He did say to me, 'I've never loaned money out and had anyone pay it back,'" recalls Russell, who lives in Del Mar, Calif. "I said, 'You've never loaned money to me.'" But Russell has been on both the lending and receiving end of personal loans and she admits they're fraught with problems. "If you want to lose a friend, loan them money," she says.

Speculating
Credit counselors and financial advisers have pretty much the same story to tell.

"The first byword is that lending to family and friends on a handshake is probably one of the most speculative investments you'll ever make," says Catherine Williams, president of Consumer Credit Counseling of Greater Chicago.

"If you respond to someone for money, you're asking for trouble if you expect that money back," says Dr. Tahira Hira, founder of Iowa State University's Family Financial Counseling Clinic and founding president of the Association for Financial Counseling and Planning Education. "If you think you want this money back, and you expect the money to be returned, when it doesn't come by that time, it's the start of a deterioration.

"If you write it off emotionally in your own mind, then that's a different situation. If the money comes back on time, which will be a miracle, or if it comes back later, you'll be happy."

Should you loan a friend or family member money? It all depends. Virtually anyone can find themselves in a situation in which they need a helping hand. Any number of situations -- a job layoff, an extended illness, a divorce, or an unexpected expense like a major car repair -- can lead to a situation in which a friend or family member needs a hand.

Williams and Hira both noted that lenders need to be prepared to deal with borrower behavior that might tax the relationship while the loan is being repaid. It may be an attitude that rubs you the wrong way, or a purchase made when you're still owed money that the borrower has told you he can't pay back right now.

"Let's say Susie and Bob show up to the family picnic," Williams says. "He's got a new Coleman stove, he owes you money, and you're doing the slow burn."

No simple formula
"It's a very legitimate and more-used source than we realize," says Hira, "but it should be used to meet a shortfall, not to take the place of someone's responsibility. Before you include a check with your hand of friendship, think long and hard about whether you can afford it."

If you are asking for a loan of more than $100, you need to know the answers to at least three key questions:

Three key questions:

• Why do you need the money? • How do you expect to pay this back? • What are you doing so this doesn't happen again?