Deciding
Before answering, settle three things in your own mind. The first is whether you could lose the whole amount without hardship, and money that would come out of your emergency fund fails that test. The second is whether the need is a single gap, such as a security deposit or a car repair, or the latest episode in a pattern. The third is whether a gift would serve better. Two hundred dollars given freely does less damage to a friendship than a thousand lent and brooded over. If the answer is no, say it briefly and kindly, without a lecture.
Put it in writing
Any sum you would not shrug off deserves one page of paper. A simple promissory note names both people and states the amount, the date, the repayment schedule in specific sums and dates, any interest, and what happens if a payment is missed. Both of you sign it. The note does not signal distrust, and it exists because two honest people will remember a spoken arrangement differently within a year. Send the money by electronic transfer and not in cash, and ask the borrower to schedule repayments as an automatic recurring transfer.
The tax rules
A gift below the annual gift tax exclusion, a figure the IRS adjusts, requires no reporting, and above it the giver files a gift tax return and almost never owes anything. A loan of more than $10,000 should charge at least the applicable federal rate that the IRS publishes monthly, or the IRS may treat the missing interest as income to you. Any interest you do receive is taxable. A large family loan, such as help with a down payment, justifies an hour with a tax professional.
Co-signing
Co-signing is not a character reference. In law you are a borrower. The debt appears on your credit report and counts against you when you apply for a mortgage, every late payment marks your record, and the lender may pursue you for the full balance. The lender asks for a co-signer because its own analysis says the borrower may not pay.
When it is not repaid
Send one polite and specific reminder, in private. After that, either forgive the debt out loud and mean it, or take your written note to small claims court. The corrosive choice is the third one, where nothing is said and everything is remembered.
Tip When you are the borrower, propose the written terms yourself, pay a little early, and report any delay before the due date instead of after it.
