What to do when financial success makes you the lender of choice.

I always tell people I'd rather arrange a bombing than a family loan," says Judy Shine, an Englewood, Colo., financial planner. Consider that advice to be a modern version of Polonius's fatherly caution to Laertes in Hamlet: "Neither a borrower, nor a lender be; for loan oft loses both itself and friend." While there's nothing wrong with helping a family member, love and unpaid debts are a volatile mix. So what should you do when your son asks for $10,000 to put a down payment on a house, or your sister wants $25,000 to launch a business?

Seriously consider whether you are willing to do without the money, perhaps forever. Face it: Most family loans are risks that banks would turn down. And even when your kin have good intentions, it's natural that they'll expect parents, grandparents or well-off siblings to be lenient creditors if money gets tight. "Lenders never consider how resentful they'll be if they don't get paid back," says Shine. "If you're supposed to repay me when you get your bonus, and you pay off your credit cards instead, how will that make me feel?"

Sometimes the consequences are truly ugly. Jeffrey Condon, co-author of Beyond the Grave: The Right Way and the Wrong Way of Leaving Money to Your Children and Others, tells of a client who lent $250,000 to a son-in-law who never repaid. Reminders turned into nags and then a threatened lawsuit, which was countered by threats to keep the in-laws from seeing their grandchildren. Such scenarios are not all that unusual, planners say.

One solution, if you can afford it, is to give all or part of the requested sum as a gift. Or you could consider the sum an advance against a child's inheritance. (That's how Condon's clients finally restored family harmony.)