The Right Way to Make a Personal Loan

Loans between friends and family members are actually pretty big business: the World Bank estimates that such borrowing totals about $300 billion a year, and the borrowed money provides as much as 41% of personal income in some developing countries.

But the way many people lend money to family and friends is far from businesslike. Often, there's no discussion of interest rates, repayment terms, or the consequences of default. Frequently, what started as a loan turns into an involuntary gift when the lender fails to pay back the money.

Even when payments are made on time, the loan can strain the relationship. The lender might start questioning every purchase the borrower makes, with an eye to whether there ...

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