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60 Second Savings: Lending Money

Lending money to friends and family is not simple -- here's how to do it.

You've decided to lend money to Aunt Jane or your college buddy.

They, in turn, promise to repay your loan in good time. But life isn't perfect -- and neither is lending money to people in your life.

If you decide to help out your loved ones, consider these tips that may help better manage your money as well as important relationships.

First, set limits. Be comfortable parting with the money. Whether you lend $5 or $5,000, make sure it's an amount you're prepared to never see again. If you're up all night worrying about whether you'll be paid back, it's probably a bad sign.

"The best policy for small amounts is to never lend money that you expect back," says Jeffrey Strain, founder of Did you lend $10 for lunch? Or $15 for a cab ride? Kiss it goodbye. "It isn't worth losing a friendship over," he says.

Next, don't lend money you don't have. It may sound obvious, but because it's a loved one, you may make a desperate move and dig into a retirement account or your child's college-savings fund.

"It's important you don't lend money that's going to overextend you," says Jim Smith, vice president of marketing and sales at, an online third-party agent that facilitates loans between two parties, usually friends and family members. And don't worry about saying no, he adds. Cash-strapped friends and family are likely to understand if you just tell them that money is tight for you.

Finally, for big loans, say hundreds of thousands of dollars for a friend's small business, you may want to devise a written contract stating how much was borrowed, who owes what, when it needs to be paid back and whether it will be returned in increments or all at once.

A Web search for "promissory note" will lead you to some sites for free promissory notes and templates. Others opt for third-party help such as "It puts a nice business buffer between the two parties," says Smith.

Finally, should you include interest with big loans? Strain sees no problem with charging loved ones interest, considering that your money could be earning up to 4% or 5% APR in an online savings account. "If they balk when you mention interest, that's a good sign you shouldn't be lending to them," he points out.

To view Farnoosh Torabi's video take of today's segment, click here.

Farnoosh Torabi joined TV in July 2006 as the site's first official video correspondent. Previously, Farnoosh was a business producer and on-air reporter for NY1 News, Time Warner's 24-hour news channel in New York City. Farnoosh is a regular columnist for AM New York and has written for Money, Time, New York Daily News and Newsday. Farnoosh is a graduate of Pennsylvania State University, with a degree in Finance and International Business and holds a M.A. from the Columbia School of Journalism.