Assume you are approached for financial aid by a friend, sibling, other relative, a colleague, or perhaps your own child who is now an adult. Would you lend him or her your money?

You might think about it if you are a charitable person. But it’s also likely, and perfectly OK, that you might be reluctant to help.

Here are seven considerations you should make before you decide on such a matter.

1. How generous are you?

You might be a kind-hearted person who’s empathetic and willing to help others. Sadly, this opens you to potential financial abuse by untrustworthy people.

In a money-lending situation, it would be wise to consult knowledgeable others to get their input, as such counsel could protect you from potential losses.

2. Why do they need the money?

A responsible person is one who takes care of their finances. But life can still throw curveballs that might result in a person needing help with their financial woes. In this case, it is OK for you to decide to help them if you wish.

But if the person is one who spends lavishly, flaunts wealth, gambles, and is overall financially irresponsible, you might want to ask why you should offer a bailout.

3. Will this affect your relationship?

Some lend money because they value their friendships and relationships, and saying no to friends and relatives can be difficult.

It’s important not to fall into a “guilt trap”. How, when and where you choose to spend your hard-earned money is entirely up to you.

Don’t worry about being called stingy by those you refuse to lend money to. If these people label you as such, there’s very little point to keeping them in your life.

4. What happens if you say yes?

Let’s say you agree to lend RM10,000 to your friend or relative. Do you just transfer this amount to their bank account?

It might be convenient, but it’s not very smart. It’s better to have a “friendly loan agreement” between you and your borrower. Such an agreement is recognised and governed by the Contracts Act 1950, and protects your interest as a lender.

You may engage a qualified legal practitioner to draft out such an agreement, which should contain the following information:

• identification details of borrower and lender;
• loan amount;
• method with which the money is transferred to the borrower;
• agreed payment schedule of the loan;
• imposition of interest rate, if any; and
• specification of collateral involved, if any.

Also, it is recommended to have one or two witnesses co-sign the agreement. Keep a copy of the transaction slip after transferring the money. This will be crucial in the event of a dispute.

If your friend or relative refuses to sign the agreement – well, there’s no bigger red flag, is there?

5. How much interest should you charge?

You might wonder whether you should charge any interest. While this is permissible, be mindful not to act as an unlicensed moneylender. Any interest rate should be minimal and reasonable. Remember, your intention is to help your friend or relative.

Also note the tax implications of such interest, should you decide to include it in your friendly loan agreement.

6. How would you recover defaulted loans?

As much as you hope you will not be taken for granted by your friend or relative, trust can nevertheless be betrayed and loans defaulted on. So, can you get your money back, or do you write it off?

It really depends on your situation. Should you wish to pursue it, there are several ways to recover this capital, including:

• issuing a letter of demand;
• filing a lawsuit against the borrower if the above fails;
• enforcing this through a writ of seizure and sale, or garnishee proceedings – the latter a mode of enforcement for you to recover monies using a court judgment.

7. What happens if the borrower passes away?

Will your money disappear or vanish in thin air? No. The debt still exists.

If the borrower has passed on, his or her assets shall form part of their estate. If they have a will, the executor will settle your debt before distributing the rest of the estate to beneficiaries.

If there is no will, an administrator will be appointed to manage the estate, and similarly your debt will be repaid.

So, to lend or not to lend?

Ultimately, this is up to you. If you choose to lend money, it would be wise to protect your interests by having proper documentation. And remember, you can always engage a qualified financial and/or legal professional to help you.

This article first appeared in KCLau.com. Ian Tai is a financial content writer, dividend investor, and author of many articles on finance featured on KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’ and ‘Small Cap Asia’ in Singapore.