Loaning money to family can be a minefield for both your relationships and your financial future. But what if your parents ask for a loan? Should you consider it, or is loaning money to family always a bad idea?
That’s the question Sam, 25, is facing.
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Growing up, Sam’s parents were not smart with money. They declared bankruptcy when he was 10 years old after living as spendthrifts, always buying new things and going on expensive vacations.
Now, after years of hard work, Sam has saved up $50,000, which he was planning to one day put toward his share of a down payment on a home he’d buy with his partner.
But his parents have other ideas: they want to get into the restaurant business, and are asking for help. They’ve asked for a $30,000 loan from Sam to help them get started. Since the bankruptcy, Sam has noticed they’re far more disciplined with money, but he doesn’t feel comfortable handing over so much. What should he do?
What to consider before loaning money to family
Loaning money to anyone comes with risks. But when it’s your parents — especially parents with a history of financial instability — the stakes are even higher due to the relationship. Here’s what to think about before deciding on a loan.
What’s your own financial situation?
Before considering the request, take a hard look at your own finances. Just because you have the money doesn’t mean you can afford to part with it. Will this loan delay your own goals, like buying a home, saving for retirement or building an emergency fund? Are you dipping into a retirement or investment account that could trigger taxes or a penalty?
One thing to keep in mind is you should never loan money you can’t afford to lose. A common piece of advice when deciding to lend money to friends or family is you should only do it if you’re comfortable with never being paid back.
What role will you play in the restaurant?
Next, consider what this $30,000 represents: is it an investment, a loan or a gift? If it’s a loan, what are the terms of the loan? When and how will they repay the funds, and at what interest rate (if any)? If it’s an investment, will you receive equity or have a say in operations? Without a clearly defined role and a written agreement, things can get sticky.
What’s their plan for the restaurant?
A business idea isn’t the same as a business plan, and restaurants are notoriously risky. Before loaning a cent, ask to see:
- A complete business plan with financial projections
- Market research report
- A breakdown of startup costs and monthly expenses
- Vendor contracts and lease terms (if they exist)
- Contingency plans for setbacks
If your parents haven’t done this type of groundwork, it’s a strong indication they’re unprepared for such a serious venture.
Read more: I’m almost 50 and have nothing saved for retirement — what now? Don’t panic. These 6 easy steps can help you turn things around
What happens if the restaurant shuts down?
Even if everything starts off strong, the restaurant industry is unpredictable. What happens if the business fails? Will your parents be able to repay you, or will they simply walk away, leaving you down $30,000? Think about how that outcome would impact your financial situation and your relationship with your parents.
How to navigate loan requests from family
You don’t owe anyone access to your savings — even the people who raised you. No matter what you decide, protecting yourself must be a priority.
If you’re leaning towards saying yes
If you’re satisfied with the planning and research done by your parents, and you’re prepared to offer the loan, make sure to get everything in writing. Draft a formal loan agreement that includes repayment details (including interest rate, if any), a timeline and what happens if they default.
It’s also a good idea to set boundaries. This can be based on your role. Are you an official investor with input, or just a lender? Don’t let them pressure you into offering more than you’re comfortable with.
There’s also no need to rush to a decision. Take the time to think through all the challenges, and don’t let your family push you to decide quickly.
If you’re leaning towards saying no
Turning down your parents can be hard emotionally, especially if you have a complicated relationship. But protecting your future isn’t selfish. After all, we’re talking about handing over the majority of your savings.
It can help to be straightforward and kind. Acknowledge how far they’ve come, but be firm about your boundaries. You don’t need to justify your decision with detailed reasons — explaining that the loan would put you in a financial bind should be reason enough, and it’s the truth. They may even sympathize with you, since they know what it’s like to face financial trouble themselves.
Consider offering support in other ways if you’re comfortable with it. You might not be able to fund their business, but you might offer to review their business plan, connect them with small business resources or help with loan or grant applications. Helping them build a budget for the restaurant can also aid in their success.
Loaning money to family, especially your parents, is a deeply personal decision. Try to separate your emotions from the facts, and make the choice that best supports your long-term financial well-being. Saying no doesn’t mean you don’t care, it just means you’re being responsible with your future.
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This article originally appeared on Moneywise.com under the title: My parents — who went bankrupt when I was 10 — want me to lend them $30K to open a restaurant. Tell me how to say no
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.