A tale of two loans and two friendships: Guiliano Stiglitz, an executive who lives in Miami and London, says he has never had any resentment over money he loaned to a friend, even as much as $200. "I write it off immediately," he says. "If they return the money, it is a pleasant surprise. If they don't, well, I already knew."

But Vivian P., a textile designer in New York City, felt differently about the $300 she loaned to a friend who needed it to pay her rent. Vivian's resentment flared when the loan went unrepaid, and the friend regaled her with shopping stories. "Soon after, I was desperate for money, pregnant, and terrified. I was confiding in her as a friend," she recalls. "I remembered I lent her the money, and she was convinced we had made a deal where I said she didn't have to pay me back."

A Sensitive Subject

Lending money to friends and family ranks among the most pernicious of relationship stressors. An unrepaid $100 here or there may only engender bad blood (or a write-off), but what about $8,000 for a new car? Or $10,000 to pay tuition? With thousands of dollars on the line, no karma is worse than that carried by unpaid debt.

Informal loans -- whether between parent and child or two strangers making deal -- can be as low-key as a back-of-a-napkin or handshake agreement. While such deals can and do stand up in court (provided there is sufficient evidence to prove the loan was made), the promissory is vague. Add in confusion regarding payment deadlines and naturally lax record keeping, and such loans are a recipe for resentment.

Dr. Maggie Baker, a psychologist and author of Crazy About Money, says that money lending between friends and relatives raises a number of emotionally sensitive issues. First, talking about money -- as in how much you do or don't have -- is often taboo. Add to that the complicated feelings about money we've all gleaned from our environments, and layer in the sensitivity of a personal relationship.

"Most people think 'I'll never get it back', and that, I think, is terribly wrong because it is symptomatic that people can't talk about money," she says.

Informal Lending is Big Business

Nearly a quarter of Americans turn to friends and family when they find themselves having financial problems related to debt, according to a 2011 survey by the National Foundation for Credit Counseling. While figures for how much money is actually swapped through informal channels are hard to find, some estimates place it at $3 billion or more a year.

It's possible to help out a friend in a responsible, fiscally sound way, provided that certain measures are in place -- among them, a solid loan agreement. LendingKarma.com provides a streamlined way to track, document and manage loans. Started in 2009, the start-up has been used to formalize $60 million in person-to-person loans. The site supports loans with easy-to-use origination documents as well ways to collateralize a loan, send email payment alerts, and track payments.

Founder and CEO Michael Kovacs started LendingKarma after college, when he needed cash for a car. He looked to his family for the money. "I needed a loan, not a gift," he says.

"For most people, asking for a loan is not fun. It's confusing and intimidating." The purpose of the website is to remove that intimidation factor and make the process approachable.

Kovac says the fee to create a loan on LendingKarma -- from $15 to $60 -- is a small price to pay "to take things seriously." With an average loan size of $50,000, LendingKarma users appear to take things seriously indeed. The majority of loans are for cars, education and bill consolidation, says Kovacs, though he has seen increasing activity in the arena of home down payment loans.

[Calculate loan payments.]

What Are You Really Borrowing?

Baker says another sensitive issue that arises when borrowing or lending money is the change in status between family members or friends that comes with exchanging funds. Where once you may have been equals or had established roles, the loan puts the lender at the top of the totem pole, and the borrower on the bottom.

"The potential loss is not only of the money," says Baker. "In a family situation, there may also be a change in relationship."

To address those issues, Baker advocates for a direct approach. Lay it all out: How much is being borrowed? How long will repayment take? How does it affect the relationship? "Get it right out front," she says. "You learn why they are really asking for the money. It cuts down on the sense of urgency to do it immediately. Having a dialogue with the other person could make it clear what real situation is."

In the end, the Bank of Friends and Family is often the lender of first -- and last -- resort. To keep the relationship stress-free, both Kovacs and Baker emphasize the importance of putting things into writing.

"Even if the loan goes bad, a properly documented loan can at least afford the lender a potential tax write-off," says Kovacs.

Five Tips For Loans with Friends and Family

1. Decide whether it is a loan or a gift. "If it's a loan, treat it seriously. Half measures are often the cause of great misunderstandings, and we have the tools to help people succeed," says Kovacs of LendingKarma. "A minimal upfront effort and cost will save lots of pain -- and relationships -- later."

2. Put it in writing. Whether you take a formal approach with an online service like LendingKarma, or write things down on a piece of paper, make sure to include the loan basics: the amount of the loan, interest rate, repayment schedule, collateral if necessary, and have both parties sign it. Blank contracts that are valid under individual states' laws are also available online.

3. Don't lend more than you are prepared to lose. Even the most well-intentioned borrowers can default on a loan. For lenders, that risk can be secured with collateral (like a car or other item). Otherwise, be prepared to take the loss. If you have the loan properly documented, you can write off the loss on your taxes.

4. Ask the borrower to look for other sources for money. If you feel strongly about not risking your relationship over money, Baker recommends looking at all the alternatives. A bank or alternative source of funds can reduce the feelings of all-or-nothing when a relative asks to borrow money.

5. If you're negotiating terms of the loan, bring in another person. Whether you feel you are being strong-armed into loaning money or the emotions are heating up, bringing in a neutral third party can help defuse the intensity of the conversation.

[More tips are available from the National Foundation for Credit Counseling.]

Catherine New is a reporter for DailyFinance.com and Aol Huffington Post.

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May 03 2013 at 11:48 AM Report abuse rate up rate down Reply
bartandyc

the people spouting the complete downside to loaning or giving (money / help) are usually the ones that have or will gain the most from anothers hard work or efforts, especially those who inherit millions from parents ,then act like they deserve even more lol most have paid little or no taxes and wouldnt give a dime to any charity or individual without turning a profit from it.they think by being on the earth that they are a gift to society ! the greedy have already lost their souls.

April 24 2011 at 3:18 PM Report abuse rate up rate down Reply
Phillyfreeze69

Five excellent recommendations for loans with friends and family member and anyone else who do
not follow the rule of..."he who goes a borrowing, go a sorrowing."

April 24 2011 at 2:48 PM Report abuse rate up rate down Reply
tbkomparda

A best friend of mine for 34 years, she's married and has a handicapped son since birth who is now 20 asked me Last July to be an executor for her Son's trust that she wanted to draw up with an attorney if anything happend to them. My friend told me that she was loosing sleep because she didnt have the $2,000 needed for the attorney fee.
My Husband and I have money and since I was to be the executor and she has never asked me for money before I gave her the $2,000 as a gift. I asked her in October what the deal was, she told me that she was looking for the best attorney. Fast forward three days before Christmas she calls me desperate because they are in a financial bind and won't be able to have food or presents, I meet her and give her a check for $1500. She asks me in January if its a loan, I told her that I just want to see them get on their feet. The bought a house last year with a settlement and put too much money down which was I know stupid. Now its Easter, she calls me last week i'm sick as a dog on antibiotics and says that they don't have any food and will have to go to a food pantry for Easter I asked her how much she needed thinking $100, she tells me $1200. I went to the grocery store and got a couple gift certificates so I know that it would be used for food. The part that really made me mad was that I actually had to call her to ask if she got them in the mail and she was like oh yeah we got them yesterday I feel so hurt. . I feel
totally used and feel like a sucker even though it was my fault, old friend, big heart. I dont even feel like speaking to her again but when I do I am going to tell her that that was the last time even if it hurts our friendship

April 24 2011 at 2:19 PM Report abuse rate up rate down Reply
Charm

My husband and I lent 'friends' money when they were going though a rough financial period. We had been in that position, who hasn't? We felt it was the right thing to do. My husband died very shortly after, needless to say, EVERYONE that borrowed money suddenly fell off the face of the earth, family members of theirs that we were also frendly with for decades also disappeared, others 'forgot', others flip flopped between offering to pay & never doing so, to agreeing all along it was a loan they needed to repay to oh, it was repayment of a loan I gave YOUR husband (that one was unforgivable) after standing near his casket and telling me at the wake, they didn't forget about the loan and they wouldn't screw me over-which was exactly what they did. Since his death, I have not seen one cent of the repayments from any of them. What I have learned is that when you are at your lowest, people will find a way to get more for themselves. It took his death and the aftermath for me to see what kind of people they really were.
The reality of the situation is they stoled from a widow with a small child to raise, now that takes a real person of character to do that doesn't it? Anyone who agrees to a loan and then deliberately doesn't repay it, not even $1 of it is nothing but vile.
You owe money, you repay it.
And yes, I pray that bad karma follow them everyday of their miserable lives for what they have done. I have no forgiveness for them, they are well aware of our situation and still they did what they did-STOLE.

April 24 2011 at 8:05 AM Report abuse rate up rate down Reply
Holly

I'm sorry, I value our relationship too much, I just can't put that kind of tension between us. -----JUST DON'T DO IT

April 23 2011 at 3:27 PM Report abuse rate up rate down Reply
PaulC

Whenever I don't want to see someone again EVER, I loan them a small amout of money. Usuallu $50.00 will do the trick.

April 23 2011 at 11:14 AM Report abuse rate up rate down Reply
granderick664

granderick664@aol.com

April 23 2011 at 4:56 AM Report abuse rate up rate down Reply
granderick664

hi my name RICH I HAD GOTTEN HRUT IN WORKON 3-07=08 I LOST MY JOP IAM ON PEN'FUNDS ARE 1850'MT'MY MORGAGE IS 994 PLUS MY BILLS FOOD I HAVE NO BLUE CROSS AFTER 30YRS MORGAGE BAL.124.OOO BILLS12.000 IAM DOING NICE MY HOME IS WORTH 350.000 ITS OUR FAMILY HOME FOR 50 YRS.I NEED HARD TO SAY CAN NOT REF.FUNDS ARE LOW IAM NOT BEHIND I LIVE PENNIE TO PENNIE HOPE TO FINE A MILLONAIRE TO WORK WITH MY PENNIES PHONE 215 6683572 PS NICE WORK WITH MY FUNDE 4 NOT GETTING BEHIND

April 23 2011 at 4:54 AM Report abuse rate up rate down Reply
norie777

What if the remaining elderly parent keeps giving to one adult child and even refinances his mortgage and runs up his credit card just for that one child, and then he dies, and the rest of the 4 children are left without an inheritance? The intentions of both parents were to divide their money & property evenly among the five children, but now it's about gone. It doesn't seem right to me. And the abusive child commented that the father is senile and won't remember anyway...Definite abuse!!!

April 22 2011 at 7:23 PM Report abuse rate up rate down Reply