The next time you're inclined to agree to a loan to family and friends, follow these tips to make the transaction as business-like as possible:
Don't risk more than you can afford to lose. Consider all loans to family or friends as high-risk - if they weren't, the person who's asking for help would probably be approved by a bank.
Put it in writing. Draw up an agreement that you and the borrower sign in front of a witness and notary. Specify the amount that's being borrowed, the interest rate, the term, and a detailed repayment schedule.
Beware of interest-free loans. If the borrower is unable to repay the loan, you may be able to declare that loss on your tax return - as long as you've charged interest.
Understand your tax responsibilities. The interest payments you receive are considered income and must be declared on your income tax returns. The tax code on loans between "related parties" lays out a number of rules for the tax liability of both the lender and the borrower. Before you become a party to this kind of loan, check out the ramifications.