Loaning money to family and friends can get tricky because, well, they're your family and friends. This makes drawing up a formal in-case-of-default agreement all the more important. CNN Money has some tips on how to do so.
Photo by Omar Omar.
It may seem awkward to ask family and friends to sign a formal agreement, but where large loans are concerned, it's the prudent thing to do. As CNN notes, the point of the agreement is to do away with any notion that because you are close to the loaner, s/he can be lax about repayment. In essence, a loan agreement "makes it clear to the borrower that he or she is taking on a real financial obligation and that you expect it to be repaid". Placing it in writing gives the agreement more weight than a verbal promise between the parties.
The article also suggests finding a promissory note and using that as a template instead of writing up your own contract. Mixing business with family is always a delicate situation, and it's great when you can help out your loved ones, but remember: If it's a big enough loan that you'd be upset if you didn't get back, taking these steps can help everyone involved.
Lending Money to Family Members [CNN Money]