The pitfalls of lending money to friends and family

NEW YORK - A new survey by Bankrate found that roughly 7 in 10 Americans have lent money to friends and family — and about half of the time it doesn't go well.

"If you're going to lend money to a family member, you're well within your rights to know what it's for, to know why they need to borrow it," said Simon Brady, a certified financial planner and the founder of Anglia Advisors.

Experts agree that communication is key and putting the terms of any loan in writing is a must.

"There are online resources where you can get what's called a promissory note and you can have it notarized," Brady said. "If you have a lawyer in the family, a friend who's an attorney — maybe throw together a document for you as a favor."

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Brady added that you should consider charging a small interest rate such as 3% or 4%, set up automatic payments, and avoid cosigning at all costs.

"Your own credit could get potentially wrecked due to the actions of someone else. So I would recommend not cosigning at all," Brady said. "The other thing I would say is for a meeting for a few hundred bucks, the IRS is not going to get involved for meaningful amounts of money. The IRS is going to assume that you are getting an interest."

Etiquette expert Thomas Farley of mister-manners.com said a good rule of thumb is don't lend money to loved ones unless you can absolutely spare it.

"In general, money is the source of strain in all sorts of relationships. So I would advise in general if you can avoid it, never ask a friend or family member for money," Farley said. "And unless you know you can absolutely spare it — don't lend a friend or family member money unless you're willing to see not only the money go bye-bye, but perhaps even the friendship go bye-bye, too. And I don't think it's worth it."