I will start off by saying DO NOT DO THIS. Now that I have said that, almost no one will listen to that, so let’s talk about how to do this in such a way that it might be the most successful way to do it.
1. Have a written out contract. This is essential. So many things are done on a handshake, only to be fought over later. So, write out how much was borrowed, the agreed upon payback timing, and if there will be any interest charged or not. There are even websites out now that you can utilize that will help you to set all of this up.
2. Consider having a third party be a mediator in case there is any issues with the loan or the repayment over time. It might be easier to work things out with a neutral party than it is to argue about the money with each other.
3. It may not be a bad idea to have in the contract a clause about what will happen if the loan is not paid back in the agreed upon way, such as going to court of the use of a collection agency. While that may sound sever, it does give credence to the seriousness of the loan and shows that this is a contract that is not to be gone into lightly.
4. Do not talk about the loan. If it is being paid off, then let it get paid off. Do not let money come between friendships and family and keep this elephant out of the room as much as possible.
5. I would not recommend lending money to someone that you know is a poor manager of money. If you want to help them out, you might consider managing the money for them so that you know how it will be spent and used in a proper way. For example, if the person who wants money also is known to be rather frivolous when they actually have money in their pocket, you could agree to only pay certain things for them, such as bills or for food. You could also demand that they show you a monthly budget to see where the money has gone so that you know if you want to continue with this loan agreement or not. Again, a third party may also be great in this instance.
6. You could tell someone that you will only lend them money if they take a money management class.
Just know that lending money to people can easily affect your relationship with them, and more often for the negative than for the positive. I once heard a popular talk show host say that she does not lend people money – she gives it to people. The reason is that she knows that she will not see it again, so if it is a gift, there are no hard feelings. I think that this might be the best advice of all: If you lend it, you might just want to make it a gift and save yourself a good chance of hassle.