Make no mistake: Borrowing from friends and family is tricky business.

At first glance it seems like the perfect situation: They love you. They’re more likely to sympathize with your need than a bank; and you’ll definitely pay the money back.

But imagine a trip to the mailbox. You mindlessly open the door and pull out a single piece of mail. Shocking you awake, the telltale uniformity of the white and blue business envelope  screams, “You owe me money!”—which is the last thing you need screamed at you today.

The blood that once flowed unnoticed through your veins abruptly invades and warms your face uncomfortably. You huff and stuff the bill away so you can forget about it for a few hours.

Do you know that feeling? It’s not exclusive to paper invoices; this feeling is also the fatal flaw in friendly-lending. What if you felt the same resentful dread every time you looked a friend, or a parent, in the eyes?

Personal loans, unless handled very carefully, have potential to cause destructive rifts and grudges. Before approaching a friend or relative for money, always investigate the alternatives.

Peer to Peer Lending

If you’re tying to avoid the high interest rates bank loans and credit cards entail, or you don’t qualify, look into peer to peer lending (click here for a past post about P2P) for a happy medium. Peer to peer Websites can offer the personal touch and low interest rate of a personal loan, without the latent tension unpaid (un)friendly debt brings to social gatherings.

With P2P lending you can get personal about why you need the loan, which doesn’t matter to a bank but may sway a peer lender to make you an offer. Some sites use your credit score to determine your interest rate, while others like Prosper.com let lenders “bid” on your loan with lower interest rates.

IOU, 401(k)

The jury is out on whether borrowing from your 401(k) is a good idea (click here to read more), but if your need is short-term (meaning you can pay it back in a year) you might consider it. One plus of borrowing from your 401(k) is that you’re essentially not paying interest on the loan. There are interest fees, but they go back into your original nest egg to restore the balance as time goes on.

Other pluses: there is no credit check (heck- you’re lending to yourself) or fees involved with 401(k) borrowing, aside from the interest that you put back into it.

The Last Resort: Personal loans

If all else fails and you have to take a personal loan, here are some ways to minimize the awkward tension when love and loans collide:

• When you approach someone close for a loan, keep in mind that your relationship is more important than the transaction. Decide ahead of time that if your friend/relative chooses not to lend you the money, you won’t interpret the refusal as a personal snub. Likewise, if they lend you the money, show that you value the relationship by making payments a priority

• Insist on making a written agreement, a promissory note. It’s significantly easier for you to suggest a formal contract than it is for your BFF to uncomfortably ask you for one. Consider your responsibility to find and pay for notarization

• Make it official with a third party. Virgin Money–the same “Virgin” that puts out Ben Harper’s CD’s– is a quasi-peer-t0-peer lending Website that makes friend/family loans official, formal and structured.They manage the payment process and transfer money from your account when the payment is due. As can be expected, Virgin Money’s service entails service fees and charges for the electronic payment transactions. The biggest perk about using a service like VM is that you can have a formal agreement with your friend/family member lender, and once the agreement is made neither of you have to bring it up again because the service will manage the financial transactions. Thus you avoid payment-reminder phone calls that start with, “so how is your mom?”

• Make very rich friends

Have you ever taken or given a personal loan? How did it turn out? Post your comments below