In these uncertain economic times, many employers are looking for ways to help their employees out financially. Employee loans from companies are a popular option nowadays. But what are these types of loans and how do they work? This guide will help you understand everything you need to know about.
There are many different types of employer provided loans available, each with its own set of benefits and flaws. In this text, we will introduce you to the most common loans for employees and further explore their advantages and disadvantages. The riskiest thing you as an employer should worry about is whether you will be responsible for repaying the debt if the employee is unable to do so. If you are not ready for this type of responsibility, then it is important that the terms of the loan are understood and that it is crystal clear to the employee what kind of risk you are taking.
Another thing that should be carefully considered is the consequences that can occur. In case this is not approached correctly, this type of loan can negatively affect the morale of the workers. Before offering a loan keep this in mind.
If you have thought carefully and taken everything into account beforehand and decided to give an employee a loan, below we highlight the most common types of this loan.
- Salary loans. Usually interest-free and can be an excellent way to help an employee if he needs them for unexpected expenses, emergency situations or to afford something. There is no specific rule for this type and it is recommended that you set a limit on the amount you lend to them, to make sure that they will pay it back on time.
- Education loans. Beneficial for both parties. With this type of loan, you let the employee know that he is an important asset to the company. By financing their education, you are encouraging them to do even more for the company.
- Car loan. Helping an employee buy a car, this type usually lasts for 5 years. The advantage for you is that you would be the car owner instead of an employee until he pays the full amount. Another benefit is that you would thus secure his place in the company because upon termination or resignation, he would be forced to pay the current remaining amount.
What Exactly Are Employee Loans?
These employment-based loans are a type of financing that allows employees to get a loan from the employer. The employer and employee usually discuss the terms, and repayment is made on a monthly basis through salary deductions. Loans for workers can be a great way for employees who don’t qualify for traditional types of loans and need quick cash
How Do Employee Loans Work?
Loans for employees are personal loans that they receive from their employer. The conditions vary from company to company and it all boils down to an agreement between both parties, but the employer expects the loan to be repaid within the agreed time period.
Some employers may decide to give staff loans as a package of employee benefits. Some as a way of helping to cover costs or additional money for the needs of workers. And others as a strategic move to keep an important employee in the company.
Regardless of the reason, loans for employees can be a way to show that you care about them and their financial situation. If you have decided to do so, here are some things you should keep in mind:
- Loans to employees are taxable income, so you will have to withhold tax on the amount of the loan. Make sure you understand the tax implications before you decide to do this.
- Consider offering interest-free loans. This can help your employees save money on interest payments and even better the relationship between you and the employee.
Employee Loans: Pros and Cons
There are many factors to consider when it comes to this. As an employer, you want to provide the best possible benefits and compensation package. This can be just the way to help them in a financial crisis, but of course, there are also flaws that should be considered. Comparing the pros and cons will help you decide if this is the right option for you.
- Retaining important employees. With this offer, you show them that you care about their finances, and the chances that they will stay increase.
- It can improve morale and dedication. By investing in their future, they are more likely to work hard for you.
- Employees who have access to loans may be less likely to experience financial difficulties and stress.
Since we have gone through some of the pros, let’s see what the cons are.
- The risk is that the employee will be late with his loan or default on it, which can lead to financial problems for the employer as well.
- A bad atmosphere can be created among employees, because others who did not get that offer may think that there is a privilege between them.
- Offering loans may violate state or federal laws.
When Do Employee Loans Make Sense?
Some of the situations in which it is logical for the employer to lend money to the employee is when the employee is in a bad financial situation and needs help to cover some expenses. This can be a medical bill, a small repair at home, or a car repair. Another situation can be when a worker needs help with a down payment for a home or a new car. Finally, the employer can help pay for the employee’s education, which benefits both.
Alternatives to Employee Loans
One of the alternatives to employee loans from the employer is a salary advance. This would be done through payroll deduction, and the worker would repay the advance through subsequent deductions. Another alternative is to offer a debit card that the worker would use for urgent expenses.
As an employer, you may be seriously considering an employee loan program as a means to attract or retain top employees. It is clear that there are many benefits for both you and them, but there are also certain risks, which you should definitely consider before making a decision. In this post, we have looked at both sides so you can be informed and make the best decision about whether this is in your business interest or not.
On the positive side, this type of opportunity and the way you treat your employees will show that you not only care about them and their condition is important to you, but also that you are ready to help and participate in their success. It is highly likely that this will create a sense of loyalty and support them to put more effort into doing the job. In addition, this will ensure that an important worker does not leave the company or when deciding on a potential new one, that they choose you as an employer.
On the other hand, there is a risk that in this process you may break some law or that employee will not repay their loan. Of course, you also risk the relationship between the staff, because they may feel as if you are treating them preferentially.
Ultimately, it all depends on you and your situation, whether this is exactly what you are looking for in your business.