Here are some steps to take to set up a family loan:
Make sure you are in a position to fund a family loan. If it will make things tight financially, just say "no."
Consider the borrower's income and repayment history. If they have a history of not repaying their debts things probably won't be any different this time.
Get a loan agreement drawn up after terms have been agreed upon verbally. There is a minimum interest rate for family loans set by the Internal Revenue Service (IRS). The rate is the Applicable Federal Rate (AFR). To avoid getting into hot water with the IRS you'll need to charge at least the AFR on the money you loan. An exception to this is if the loan is less than 10k. The IRS doesn't really worry much about loans of that amount or less.