You could start by asking your accountant or financial advisor’s what to do but in my opinion, personal loans are a touchy subject. They have been the culprit in the destruction of many relationships among friends, relatives and creditors.
Personal lending can be looked at in one of three ways. You can loan money to someone who is otherwise responsible and has a history of paying back, or you can give them the money as a gift and use it as a tax write- off or you can teach them how to fish.
Having been professionally employed in working with homeless people has enamored me with many a personal story involving people not knowing how to fish. Often times the difference between learning principles for future success and being able to problem solve lays in knowing how to fish. The trick here is to teach potential borrowers ways to come up with extra cash so they can avoid adding more stress to their lives. One way is to help them register with a temp agency. They can work on days off from their regular job.
Still, if you must make the loan make the deal based on getting some collateral from the borrower. It has to be something they value and use, that is hard to replace on a daily or weekly basis. Like their favorite camera, or a leather coat.
If this does not work, you could enlist their labor. By this I mean, give them a job around your home to do, such as cleaning, landscaping or any other job you could use a break from.
One way to help a friend avoid needing to borrow money in the future is to help them set up a realistic allocation budget. This budget type is where each area of their life receives a percentage of their income. MSN. com has a calculator model called the “60% Solution”. I think its a great tool and it works for me.
If you do make the loan and they don’t pay it back you can write it off as a loss if you itemize your deductions. But the loss comes in the form of a credit and is not refundable.