Be honest about your current financial state. Talking about money is taboo, and some love to keep up appearances, but if you are struggling yourself, don't try to hide it from others. On the contrary, if you are actively saving for a goal of some sort, let the people close to you know. Not only can they keep you motivated to make good financial decisions, but they are aware that you either don't have money to give or that your money is already going to something important, which may prevent them from asking unless they are in dire need.
Consider the borrower: are they loan-worthy? Most of us have an innate desire to help people, especially those we are close to, but lets be real....some people are more of a risk than others. If the banks have stopped issuing them credit, or have denied them for a lone, maybe you should too. Likewise, if your loved one is constantly avoiding collection calls, flippantly throwing away billing statements, or dodging certain stores because their picture is hanging up for worthless checks...It might not be in your best interest to loan them money. Now, if this person seems to generally be responsible, trustworthy, and seems to truly be down on their luck, go for it! Everyone has rough times, despite the best laid plans (or the biggest emergency fund!).
Consider offering a gift or bartering arrangement. This option gives you the satisfaction of being able to help a friend while taking away the stress of having to worry about when someone is going to pay you back. Also, some things are more valuable than money. For someone who is too busy to cook, a healthy and delicious dinner prepared by a friend may be more appreciated than returning whatever sum was borrowed. Having a handy family member check out your washing machine that seems to have a mind of it's own would be more valuable than a monetary repayment in that it could also save you hefty repairman fees. By utilizing the strengths of each each party involved, you can find a solution that keeps everyone happy.
Never loan more than you are comfortable with. There's a saying that goes "Never loan more than you can afford to lose." Whenever you let someone borrow money, there is always the risk that you will never get it back. If your budget cannot handle losing a certain sum of money, don't loan it out. Also, If someone asks you for an amount that you cannot comfortably give, remember that you are not obligated to loan them the amount that they request. Even credit cards have a limit! To someone in need, something is always better than nothing, so it is okay to offer them a smaller amount.
Set a date for repayment. We've all heard a variation of this scenario before: John borrows money from Jane. Jane sees John spending money frivolously, yet John has not paid Jane back yet. Jane gets increasingly angry with every dollar John spends. Jane blows up at John or stops speaking to him. John has no idea why. You can avoid this scenario by treating the loan as you would treat any formal business transaction: set the repayment terms. This can be a monthly installment or one lump sum, as long as both parties agree to the terms. Once it is set, you can rest easily until the agreed upon date. Now if you see your buddy wasting money on that day or they miss your payment...then you might have a problem (and can send them the angry letter with the red "Final Notice" warning...j/k), but anytime before that you have no reason to get upset.
Have you ever loaned money to a loved one? How did it turn out? Let me know!