Linda Stern of Money has a list of tips on how to lend money to family while avoiding all the headaches that come with it.
The ideas are good if you're committed to lending money to relatives (or friends), but I have a better tip: Never lend money to family or friends.
Really. It's just not a good idea. You're mixing business with relationships -- which is rarely good -- and, according to a Money magazine poll, "43% of readers who lent to family or friends weren't paid back in full; 27% hadn't received a dime." Here are a couple alternatives to lending friends and relatives money:
Give them a gift! Seriously. If 43% aren't paid back in full and 37% don't get anything back, why not just avoid the whole loan business and call it a gift and avoid all the awkwardness and resentment? If you're reasonably well off and want to help your kid get out of debt or buy a house, just give him a gift if you want to.
Let them earn it. In this economy, a lot of people who are hitting friends and relatives up for cash are unemployed or underemployed, and just looking to put food on the table. Instead of becoming your friend's or relative's creditor, just give him some cash in exchange for some work. Maybe he can help you paint the house, landscape the backyard, or cook/go grocery shopping. If he has time on his hands, this is much more helpful than a loan because you're helping him dig out of a hole instead of adding to that hole with more debt.
Look, I know that you have good intentions when you decide to lend money to someone you know. But trust me (I know from experience): There's a high probability that it will harm your friendship far more than it will help the borrower.