Making Sure It's The Right Choice

Why are you considering lending the money in the first place? People lend money for different reasons. Some do it to help out someone they know, others because they perceive it to be a good investment. Whatever your reason, understanding why you are lending money in the first place will help you set expectation—both your own and your borrower's.

Who else is impacted by your decision to lend someone money? Make certain that you discuss your plan with others that might be impacted by the loan, such as your spouse, siblings, children, colleagues, etc. For example, if you want to tap your retirement account to help your younger brother buy a house, make sure your spouse agrees with this decision.

Can you afford to lend your borrower the money they need? If you can't, then consider lending only an amount you can afford, even if it's less than what your borrower is seeking. The last thing you want to do is strap yourself for cash because you lent it to someone else. This will only cause problems and resentment between you and your borrower down the road.

What are the tradeoffs you're making in lending someone money? Make sure you fully understand the implications of what you are gaining and what you are giving up. For example, if you pull money out of a safe investment (e.g., savings account, money market, etc.) so you can lend it to a friend who is starting a small business, you must accept that you are giving up a guaranteed return for something that is more speculative.