Never loan money to family or friends. GIVE them what you can give them, but don't put them in the precarious situation as a recipient of a loan from a family member or friend. If a family member or friend ask for a loan, explain that you can "give them what you can afford", and feel free to give them these 4 reasons why you won't actually LOAN them money.
1. I don't want to feel like I have servants. Our Bible tells us clearly in Proverbs 22:7, "Just as the rich rule over the poor, so the borrower is slave to the lender." I don't want my friends and family to become like a servant that owes me something. No thanks! A servant is beholden to his master, just as the borrower is beholden to the lender. I want Christmas dinner and Birthday parties to be fun, not tense and full of any drama because they owe me money.
2. It changes the relationship. It could cost you more than you bargained for, in terms of a relationship. When people owe you money, it can make you question what they spend their money on, feelings get involved, and the tension can be binding. Better to keep the relationship in tact and stay cordial, without infusing money into the picture. Money has a way of ruining relationships. It's not worth it. I'm not saying don't do business with family or friends. I'm saying steer clear of the imbalance that is inherently created when you loan money to a relative or friend.
3. Giving is better than a loan. Give your family or friends what you can cheerfully give them, and let that be your gift to them, not a loan. You want to exercise the spirit of giving, not the spirit of lending and borrowing! It may be possible to simply give them the full amount they want to borrow. This is quite ok if you have it to give and you give it in the right spirit. Give what you can give them. Stretch and give them a little more, if you can. Promoting the spirit of giving, with a kind heart, can go a long way towards strengthening your relationship. So essentially, you can use this experience to show an incredible amount of love by extending the gift of giving to your loved one. They won't refuse your gift and they will be thankful you helped. In the end, you gave, they received and are thankful, and all ends well.
4. I don't want to add to their worries. Everybody needs help sometime and that's OK. However, I don't feel comfortable adding another debtor to their list of issues they are dealing with. If your family or friends are asking to borrow money from you then they are probably in a desperate situation. Desperation brings emotional, and sometimes, irrational thinking. Often times, helping someone is not simply about loaning them money, but it can be a perfect opportunity to help them see and realize the bevy of options that are available. Maybe you can take time to sit down with them and figure out some alternatives to loaning them. Your family and friends probably don't want to borrow money from you, as much as you don't want to lend it to them. They just need to see other possibilities. People really need advice and fresh ideas MORE than they need your money!
The bottom line is this: You want to help your family and friends, but it's not always best to help in the way they feel and think they need the help. Typically, if you have friends or family asking you for money, it means they are feeling desperate, and making money decisions in the middle of desperation, is never a good idea.
It's always in the best interest of your relationship to give, and not loan. They may not like it, but if you explain it properly, they should understand, and they will appreciate your giving, for their benefit, just as much, if not more than, they would appreciate that loan that they thought they needed. Sometimes a loan works out great, but there is always that possibility that it won't work out well. So it's better to be safe, for the sake of the relationship, and not loan, then to be sorry, and make that loan. It's going to take courage on your part, but be strong, give what you can give (i.e. money, advice, time, prayer), and you will be a blessing to them in the end!