I had a client come in recently who wanted to talk about lending a significant amount of money to a family member. It’s not something I see a lot, and it got me thinking about what you need to consider before lending money.

Lending money to a loved one might make sense if one person has money sitting making almost no interest in the bank. They can lend it to someone they trust for a higher interest rate than they’re currently receiving, but a lower interest rate than the borrower would pay a bank. If the borrower is conscientious about paying it back, both parties benefit.

However, I think you have to carefully consider the following:

• Most importantly, don’t lend more than you can afford to lose. Hopefully you will see that money again, but if you don’t, it can’t be so much that it will jeopardize your own financial stability or future.

• Formalize the loan with a signed agreement, including a payment schedule. This not only signals that you’re taking it seriously and are expecting repayment, but also provides each of you with clarity regarding the timing and amount of each payment.

• This one might be controversial, but I’d also want to know how the person was planning to repay me. What source of income will they have that will make it realistic that they can make the payments? A bank won’t lend you money unless they know that you have the income to repay it; why should an individual be any different?

Lending money to family or friends can come fraught with emotions, and they’re usually not the warm fuzzy ones. As the person being asked for a loan, no one is looking out for your interests except you. You might be under a lot of pressure to lend the money, but make sure you’re not making a decision out of guilt. If the loan goes bad and you never see that money again, it could cause a lot of resentment and poison the relationship. Then you’re left with no money and no relationship. If you’re concerned about that happening and you can easily afford it, consider making a gift rather than a loan, with no expectation of repayment.