Decide if the person is trustworthy or not

If your borrower is somewhat flaky, then it’s a good idea to lend only a small amount of money or none at all. (There's nothing to say you cannot give some money to this friend, with no expectation of repayment. You can call it a loan if you like, but you can't really get mad if your friend doesn't pay you back).
If the person is trustworthy, then you should take into consideration how much money is requested. You might be willing to lend an amount less than asked for, and if this is the case, say so. Example: "I can't lend you $200, but how about $100?"
Under all circumstances, make sure that you get your loan understanding in writing. Use a loan contract or promissory note to avoid misunderstandings.

Be Your Own Loan Agent

One2One Lending helps individuals formalize their lending agreements between the borrower and Lender.
One2One’s Agreement Builder™ guides you through creating a promissory note that is legally binding. Customers are guided through a process that helps them input loan terms (including interest rates and payment terms). Before purchasing the promissory note the customer can preview the repayment schedule which is built upon the chosen interest rate, loan term, and payment amount.
One2One also offers a Loan Forms marketplace. Customers can download a do-it-yourself promissory note that the customer can fill in the blank in a Word Document.