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A good rule of thumb is to never loan out something that you wouldn't want lost, damaged, or never returned...be it purses, clothes, cars, money, etc.
If you do loan out something, make sure you are able to not hold a grudge against the person you loaned it to (if something happens to it).
If you can do this, then I say "Loan away!"
I would have said,"That would be like asking to borrow my toothbrush".
I have a co-worker who knows about my passion for designer handbags and out of the blue she just asked me if she could borrow one of my designer bags for a wedding. I was shocked because I would never ask to borrow my best friend's designer bag let alone a mere co-worker. I really didn't know what to say, so I just said, 'Let's buy one for you. I know a shop where you can buy second hand bag.' She looked hurt and she didn't say anything anymore, but we're still good at work though, nevertheless, it was an awkward situation. Have you been in such position and if not, what would have you said if you had been in such situation?