Lending to a friend? Look out

By Bankrate.com

What's the toughest money question? It's the one that can't be solved with a calculator or even by a smart accountant.

In fact, you may need the combined insights of a family therapist, psychologist and financial planner to find the answer when someone asks: "I need money. Can you help?"

You want to help. But should you? If so, how and how much?

• Talk back: Would you lend money to a friend or family member?

With millions of people struggling to hang on to their homes, and with lenders tightening their standards, more people are approaching family members and friends for cash.

Here is some wisdom from experts on how to reply to some typical requests:

The desperate plea

A friend confides that he's on the brink of losing his house. Or your uninsured sister is being hounded by a hospital collection agency after her emergency surgery. These might seem like desperate situations, but writing a five-figure check may not solve the problem. A money problem might be a chronic situation.

Some homeowners seeking advice on how to avert foreclosure have already had friends and relatives give them cash, observes Ronald Clarkson of the nonprofit Housing Counseling Services in Washington, D.C. Months later, it's as if they've never received help, because they're missing mortgage payments again.

If you're asked to help with a desperate situation, probe to find the reasons behind it. "It calls for frank honesty," Clarkson says.

For a dire predicament that's due to continuing money mismanagement, the best help you can give may be to suggest professional help to get a long-term fix. People in deep debt can look to nonprofit credit counseling agencies, and homeowners with mortgage-related trouble can go to a housing counseling agency.

If a single event, like a temporary layoff, gets someone into a hole, a one-time cash infusion can help pull him out.

In this case, you may want to lend the money instead of making it an outright gift. But be prepared not to get it back on time -- or at all.

"I have heard from people who have made a big sacrifice to help a loved one, only to hear that someone is buying a TV or some other big item later rather than paying it back," says Elizabeth Schomburg, the senior vice president of Family Credit Management in Chicago.

Lending to friends and relatives may be easier with a third party acting as a go-between, Schomburg says. Web sites such as Virgin Money can increase the possibility of payback. For a couple hundred dollars plus a monthly servicing fee of $9, the Web site will make up loan documents and bill the borrower.

Continued: Good cause

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