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.

loaning siblings money

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.

Documenting a loan is a good idea even if you intend to write it off. You never know what is around the corner. You may be comfortable at present, but in future you could find yourself financially disadvantaged by divorce, fraud or illness. There's a chance that your sibling could recover financially and be in a position to pay the loan back when you really need it.

If you lend to one sibling, what about other family members who are hard up? Do you draw a line and say no to them?

Also take into account your partner's view about lending money to your sibling. If your sibling never pays the money back, your partner may end up feeling resentful. Getting on with your family is important but it is essential to have an agreeable partner for your relationship to thrive.

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Susan has been a finance journalist for more than 30 years, beginning at the Australian Financial Review before moving to the Sydney Morning Herald. She edited a superannuation magazine, Superfunds, for the Association of Superannuation Funds of Australia, and writes regularly on superannuation and managed funds. She's also author of the best-selling book Women and Money.
September 5, 2020 10.37pm

Many years ago a relative asked my parents for a loan so that he and his new wife could get the deposit for a house in Sydney. it was difficult for my parents, but they did it as a verbally agreed loan. Years went by and the loan was not repaid. Grandchildren arrived and the young couple developed a business and lived in the house they had bought. One day the husband discovered that his wife had been having an affair with his best friend - and they were planning to take the kids, clean out the house, and move to the blokes house. In the divorce, the wife kept the house and custody of the kids - with ex-husband paying for kids to go to expensive schools. My father asked about the loan being repaid. The ex-husband said "get it off his ex wife as she now has the house". The ex wife told my father "the loan was arranged between you and my ex husband - get it off him". Decades went by and my father still had not received the money back. He was dying of cancer and had virtually nil money in the bank. His wife was getting a Veterans Affairs wife's pension of $14.00 a fortnight and this would continue after his death. He insisted that his wife change her will to say that the debt would be deducted from anything the ex husband would receive when she died. She promised she would do this as she was also very disappointed at the ex's attitude. Years later, this was done and the (small by the time) amount was deducted from the ex's inheritance (share in house) and was shared equally to the other beneficiaries in her will. He was very annoyed that this ancient (interest free) loan had not been forgotten. Some people might say this was petty, but they thought the agreement had been deliberately ignored, that their near poverty had been ignored, and a lesson should be sent. My advice - give money as a gift, or do a loan in writing naming all parties involved.

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