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1. Document the loan terms Handshakes are never enough. Relationships can be ruined due to misunderstandings about loan terms. If you don’t write down the terms in a promissory note, future investors and creditors will also be wary.
2. Use a fair interest rate Lenders will be much happier about forgiving payments now and again if they feel that the interest rate is fair.

3. Avoid balloon payments Balloon payments or lump-sum payments at the end of the loan term are very risky for both borrower and lender. Borrowers inevitably cannot save enough to make the balloon payment and lenders inevitably cannot tolerate renegotiating the loan at the end of the term.

4. Remember the tax benefits It is tempting to avoid formalizing loans among friends and relatives, but there are tax benefits to using a formal promissory note. If the borrower cannot pay back the full loan amount, the lender is entitled to a tax deduction as “bad debt” – but only if the loan was formalized.

5. Enjoy the flexibility The ability to change loan terms, make an occasional late payment, and react to changing life circumstances makes flexibility the bedrock of loans among friends and relatives.