It isn’t difficult to feel a tug of sympathy when someone you care about – a family member, friend, or even a co-worker to whom you’ve grown close – comes to you asking to borrow money. Provided you’re able to spare a little without compromising your own finances, should you say yes?

There’s no simple answer to that question. Many people will tell you that you should never lend money to friends or family, and to bolster their argument they will gladly share horror stories from their own lives or the lives of people they know. Shakespeare even had something to say about the matter in Hamlet: “Neither a borrower nor a lender be.” But, while it is certainly a good rule of thumb to exercise caution in these matters, it can also be immensely difficult to simply say “No” to someone in need. Here are some points to consider when somebody you care about comes to you with hands out.

Can you really afford it (financially and emotionally)?

No matter how good everyone’s intentions are you always have to consider the worst-case scenario. Even if the prospective borrower seems to be a person of integrity, consider if and how you might suffer financially if for some reason he or she were not able to pay back the loan. Ask yourself if you can afford to never see the money again, and don’t loan any more than your personal finances can handle.

Emotional “affordability” is another matter: even if you can financially afford to say goodbye to the money forever, will you be eaten up with resentment if the person cannot or will not pay you back? That may be harder to predict, because we often don’t know how we will react emotionally to a situation until we are in it. The larger question is can you afford to lose the friendship, if it comes to that? That’s why it’s so important to think carefully before saying yes to a personal loan of this nature.

Is the person trustworthy?

No matter how much you may like or even love the person who is asking you for money, you need to step back and be as objective as possible. You have to consider her or his character and behaviour patterns overall. If a person is chronically in debt, he or she might be better served if you were to suggest getting serious debt help. A good place to start is one of the debt charities such as StepChange.

One seemingly obvious point to consider is whether the person is a habitual borrower, particularly one who has a tendency not to pay back loans on a timely basis or at all. If your prospective borrower is such a person, more than likely you at least have a clue about this. It’s up to you to decide whether you want to be sucked into a pattern of enabling someone who may in fact have little motivation to change.

Most of us know of people who get away with chronic borrowing for years, continually prevailing upon a friend (or several friends, in rotation) for small amounts here and there, but never managing to pay back the loans. After a while these small amounts can add up to hefty sums. If you find yourself loaning money to the same person over and over, you have a choice to extricate yourself from that situation. It may be difficult since you’ve established a pattern, and even more difficult if the person is a child or some other close relative. But for your own sanity and financial health you need to say, “Enough!” Remind yourself that it is for the person’s own good as well as yours.

Are there alternatives?

You might be able to save yourself as well as your friend or loved one a lot of grief if you discuss other alternatives. For instance, if your friend needs money for a necessary purchase such as a car or major appliance, perhaps you can help locate a suitable item at a more reasonable price than the one that he or she had been considering. If the person really does need a loan, there are several choices for both long-term and short-term loans, even if a traditional bank loan isn’t an option.

What if your friend is considering a guarantor loan and wants you to be the guarantor? Once again you have to consider the worst-case scenario and first ask yourself if you can afford to pay up if your friend defaults on the loan. You should also know that unlike payday loan interests, which thanks to Government reforms are now capped at 100 percent of the original amount borrowed, guarantor loan interests currently have no cap.

If you do say yes to your friend or family member’s request to borrow money directly, work out a reasonable agreement for payback and put the agreement in writing. But if you really have a visceral sense that you should refuse the loan for any reason at all, have the courage and strength to say no. After all, far more than money is at stake.