Risks and rewards of loans between friends
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If you're the would-be lender, should you ask for a written agreement and charge interest? For short-term loans of less than six months on smaller amounts, it's probably not necessary, Williams says.

"If we're talking about $350 over six months, you're talking about $11 in interest," she says. Now, if it's $10,000, that's a different ballpark."

To Russell's way of thinking, the borrower should offer to sign a legally binding IOU. If they don't offer, ask for one. "If there's even a moment of hesitation, note that," she says.

Hira says a written agreement is important because it helps the borrower understand the value of their request.

Respect
"If you're going to a person in your family, respect what you're asking for," she says. "This is their hard-earned money they've set aside. You should be the one offering to set up a formal agreement. This can be a much more flexible agreement, with enormous savings if you pay it off early because there are no fees. You should say, 'I understand what it means, I will give you a promissory note. I want to do it for myself. Other pressuring things will come along. If I have something formal, I'll respect that.'"

The No. 1 question, though, is how the relationship would be affected if something goes awry, since, as Hira notes, money is loaded with emotion. "If that relationship is important to you, you'll save yourself a lot if you write the money off in your own mind," she says.

"Long-term, what's the impact?" Williams says. "Is it worth getting $300 back and having your niece never speak to you, or is it a lesson learned on both parts and you move on?"

Probably the riskiest thing you can do is to either co-sign a loan or borrow money to lend to someone else. "That truly is much worse," Williams says. "That's a real bad idea."

Guide for setting up a pay-back plan
While a short-term loan of a couple hundred dollars might be arranged with a hug or a handshake, larger loans should have a more formal structure, say financial experts.

When you record the loan, make sure to include:

• The names of the lender and borrower • The date of the loan • The amount • The date by which the loan is to be repaid • The interest rate, if one is applied • The number of payments • How often payments are to be made (weekly, biweekly, monthly), and • The minimum amount to be paid.

The idea is not to try and create a legally binding document. You are simply putting the arrangement on a formal footing. This very basic process can make both parties more comfortable with the whole arrangement. It is a sign of respect, and it impresses upon the borrower that this is not a gift, not something that can be ignored or shrugged off later, and that repayment is definitely expected.

That piece of paper, say the experts, also gives the deal a better chance of working as you both hope it will when you decide to do it.

If it's a very large loan, such as one for a down payment on a house, that might be worth a trip to a lawyer's office to draw up some simple, but legally binding agreement, suggests Williams.