If you've ever watched an episode of "Judge Judy," you know that lending money to a friend or loved one can come with disastrous results.
More than 3 in 5 U.S. adults (61%) have made a personal loan or paid for a group expense with the expectation of being paid back, according to a recent survey from CreditCards.com. Among them, 59% have reported a bad experience, in the form of losing money, harming relationships or even getting into physical altercations.
"In general, my feeling is that it's not a good idea to lend to family and friends," says Ted Rossman, a senior industry analyst at CreditCards.com. "The data bears out how often it goes wrong. Feelings get hurt, and credit scores get hurt."
Still, you may be tempted to help out someone in financial need — especially in today's difficult economy.
Here's how financial and etiquette experts say you can lend money without damaging your finances — or your friendships.
3 rules of thumb for making personal loans
Making a personal loan puts you and the recipient of your money in a delicate situation on two fronts. Should they fail to pay you back, you could find yourself in a financial bind. And even if you don't urgently need the money, a failure to repay could lead to hurt feelings or awkward tension on both sides.
To avoid any of that, follow these three expert guidelines.
1. Lend what you can afford to lose
"The No. 1 rule of thumb if you're lending to friend, family or foe is to make sure it's money you can afford to lend," says Thomas Farley, an etiquette expert and author of the "Mealtime with Mister Manners" column on Today.com.
This ensures you don't compound a potentially awkward scenario by bringing financial strain upon yourself. "Put your own oxygen mask on before helping others," says Rossman.
One way to ensure you're not stretching yourself too thin: Consider the loan a gift, at least in your mental ledger. That way, you won't find yourself getting upset if your friend or family member declines to repay.
"Any money you get back is a bonus," says Rossman.
2. Put everything in writing
If you're lending a significant amount of money (and not, say, covering the check at a restaurant), having a written agreement is "vital," says Farley. "It doesn't have to be something a lawyer draws up. Just a simple promissory note."
The document would ideally include the amount of money you lent, the date you lent it and expectations for a repayment schedule.
"You're not necessarily going to enforce the document to the point of suing somebody," says Rossman. "But when these things go wrong, it is often because of a lack of communication."
3. Communicate early
Being as upfront as you can about any amount of money you hope to recoup is essential. Nearly 4 in 10 Americans (39%) say they would allow a $100 debt from a friend or family member go unpaid rather than trying to collect, according to the CreditCards.com survey.
That's likely because many people don't want to broach a thorny subject with a loved one, says Farley. But it will be easier for all parties involved if you bring an awkward topic up sooner rather than later, he says.
That doesn't mean you need to start haranguing someone the second you pick up a check. But checking in early can save a lot of hurt feelings.
"The more time you let go by, the more they're going to forget they even owe you," Farley says. "And the pettier it will seem when you try to collect."
If it's taking longer than expected to recoup your money, remember that this person reached out to you because they were in financial trouble. As long as they're making an effort to repay you, it's OK to afford them a little flexibility in the timing or size of their payments.
"Be empathetic," says Farley. "But don't be a doormat."
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