Don't let personal feelings sway your better judgment. Quite often people who cannot get a loan from a financial institution will turn to family members or close friends to help them out. And you will probably feel a personal obligation to do just that. If you insist they sign a loan agreement or a promissory note, the borrower may resist, insinuating that you don't trust them to repay the money. Do not get drawn into a guilt trip. There's a reason why a bank won't lend them the money, and for that same reason you shouldn't lend them the money either unless they are willing to put everything in writing.
Set the interest rate at a reasonable level. Check with your bank to see what its prime lending rate is, and add another percentage point. That's as good a rate as the borrower could expect to get on a line of credit.
Set attainable payment levels. Make sure the regular payments are high enough to pay off the debt within a reasonable time period, but not so high as to be difficult for the borrower to maintain.
Have the borrower provide enough collateral security to back the loan. Get the borrower to sign over assets which can be sold if the borrower defaults in repaying the loan. Collateral could include real estate and rents from investment properties, motor vehicles, heavy equipment, valuable collections such as coins or jewelry, stocks, bonds, GICs and other investments.