Managing Your Money: Shrewd Lending

One of my relatives has fallen on hard times and wants to borrow money. I’d like to help, but because I'm self-employed, I need to see my money again. What should I do to protect myself?

If you just sold a major property and are thinking of lending out some of your commission check, consider Cynthia L. Conger's advice first. She's a financial planner and president of Arkansas Financial Group, Little Rock, and says to treat money you lend to relatives or friends the same way you'd treat money you take to the racetrack: Never lend more than you can afford to kiss off.

“Too often people lend money with no legal instruments in place and have no way of enforcing an agreement,” says Conger.

For loans of $5,000 or less, Conger suggests that you write up a simple agreement stating the names of the lender and the borrower, the loan amount, and the interest the borrower will pay. It can be as simple as, “Bella Q. borrowed $4,000 from Sebastian X. on Jan. 2, 1997, at an interest rate of 4 percent. She'll pay him $333 per month for the next 12 months.”

Such a document shows the borrower that you're serious about collecting. It can also serve as proof if the borrower defaults and you decide to use it as a tax write-off.

If you're planning to lend more than $5,000, Conger suggests hiring an attorney to draw up documents and asking the borrower to put up something easily marketable--like a car--as collateral. ''With an attorney, you have more of an authority figure who can explain to the borrower the process for enforcing the document,'' she says.

How much can you afford to lend? One rule of thumb is to never lend more than one-tenth of your cash reserves. So if you have $100,000, don't lend more than $10,000.