Loan Money to Friends and Family Without Getting Burned

NEW YORK (MainStreet)—In a 1998 episode of the classic sitcom that bears his name, Dr. Frasier Crane offers to loan Roz Doyle $1,500 to help her through what they both hope will be a period of brief unemployment. "You can just pay me back whenever you'd like," he says, handing her a check. "This is your money to do with as you see fit."

Fans of the show won't be surprised to learn that Frasier later becomes agitated when he feels that Roz is spending the money frivolously on spa treatments, fancy clothing and expensive perfume. Against everyone's advice, he eventually confronts her about it. She immediately grows angry and combative. He gets embarrassed and defensive. They have a big fight, but — because this is TV — everything is resolved before the 22 minutes of airtime plays out.

In the years since that episode first aired, rising unemployment and tightening credit have made real-life loans between friends and family members increasingly common. And they're not always used solely to navigate a rough personal patch. One recent study found at least 7% of all homebuyers now rely on such assistance, while another found 14% of all business owners are turning to those they know to cover costs.

When handled as poorly from start to finish as Frasier's loan to Roz, these transactions rarely end on such an amicable note. But it doesn't have to be that way, experts say. You can actually lend money to someone who is dear to you, help them out of a jam, get repaid and remain close.

The key is handling the situation just like any other business transaction: don't loan blindly, lay out the specifics so there are no misunderstandings, and put it all on paper.