The tough decision you face when a sibling asks to borrow money.
It’s natural to want to help loved ones but lending money to a family member can be tricky and spark drama at the best of times. For this reason, it’s important to think it through before helping a sibling who has lost their job or had hours or pay slashed during COVID-19.
A global pandemic makes everything less certain. A kind and generous act during these times, such as a loan, has the potential to sour family relations or even split the family apart.
In some cases, family loans can go well and cement bonds, particularly if the borrower pays it back in full. But the unpredictable nature of the coronavirus means the borrower may not find a job any time soon and may be unable to repay the loan in a set period of time.
There is a view that if you do lend to a family member, be prepared to kiss the money goodbye. For this reason, never lend more money than you can afford to lose.
Of course, in the event that a family member’s request for money is urgent, you may have no choice. But before the money leaves your account, you need to work out if it’s a gift or a loan.
Consider your own needs
If your first response is to be generous, take into consideration your own needs, too. How much do you need in your emergency fund? What would happen to you if your or your partner’s job came under pressure?
If you need the money back in a few months, think carefully about lending it. If it is money that you need for school fees or your mortgage, don’t put it at risk. While the borrower might have a sincere intention to pay it back, you do need to consider the scenario that you might not see the money again. Setbacks can happen, particularly in a crisis.
It is best to be quite business-like with a loan. You need to have a detailed conversation with your sibling about their finances. Do they make poor financial decisions generally, or are they usually financially rock solid? If you lend them money, will you be asked for more money in the future?
Also be sure that they have made the most of the hardship assistance available: JobKeeper, JobSeeker, withdrawing money from their super fund as well as applying for bank freezes on mortgages and other state benefits.
Put it in writing
You want to avoid a dispute over whether the money was a gift or a loan. So always set out the terms of the loans including the amount, repayment schedule (perhaps when your sibling finds a job) and any interest to be charged. Unless you have it in writing and signed by lender and borrower, the reality is recollection of the deal will fade.
Loans that aren’t documented and signed are often not repaid. You could get a lawyer to draw up a document, but expect to pay around $1000.
Tim K. Dean, Credi Founder | Commentator & Expert on Family Lending, Bank of Mum & Dad and Neo-Credit Scores is available for media interviews and appearances. More…
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Formalise and manage your loan agreements online with Credi. Trusted by over 7,000 people worldwide. Takes minutes to set up
Use Credi for FREE – for all loans up to A$5000, $5000 / €5000, £5000 . Loans over cost A$20, $20, €20, £20 or other other local currency amounts (sales tax may apply).
