Family money:

Susan Hely

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.

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.

Susan Hely has been a senior investment writer at The Sydney Morning Herald. She wrote the best-selling Women & Money.