We all run into situations where we need a bit more cash, and we just don’t want to over-extend our credit. Sometimes, its just an unexpected expense that came up, and other times it is a trip that you have been wanting to take for ages and the opportunity has suddenly presented itself. When those situations come up, we often wish that payday was coming just a bit sooner, or that annual bonus paid out a few months earlier.
In many cases, we would turn to a payday loan to provide us some quick cash. In fact, every year, millions of Americans take out payday loans. In many cases, individuals will take out several payday loans each year, as the average borrower has eight loans averaging $375, and pays an average of $520 in interest. Though these loans do require repayment at the next paycheck, it can be easy to get into a cycle of borrowing continuously. As such, these loans can prey on those who are living paycheck to paycheck, or not even quite paycheck to paycheck.
Employee loans are an excellent alternative to payday loans
Whereas payday loans come from financial institutions or brokers that are specifically set up to help with this type of cash flow, employee loans are given as advances from your employer, as a way to assist you prior to your next paycheck. And, these loans don’t require repayment quite as quickly as cash loans, as you often have one year from the balance sheet date to repay the loan.
From an employer’s perspective, these loans can help to alleviate the stress that your employees may have if money is an issue. Those struggling with financial concerns are likely to lose productivity, which can be bad for the employer as well. When an employer offers an employee loan option, it can help to boost productivity and morale. Providing this benefit can also help to improve your employer reputation as it shows that you care about your people.
However, there are always concerns that employees will be unable to pay back these loans on time. If there are financial challenges now, it is quite likely that there may be financial challenges again later. When those economic challenges continue or recur, the employee may become further strapped, making it more difficult for them to make their loan payment back to you. When this happens, the employee may look to you for help in renegotiating their interest rate or the terms of the loan. And, of course, if you offer these loans to one employee, you need to make them available to anybody within the organization. Before long, this can turn your business into one that seems more like a loan office than a place of unrelated non-financial business.
If you do determine that employee loans will be a benefit of employment, ground rules must be laid out. Before providing these loans to employees, be sure to investigate the following:
- Understand why your employee needs the loan. If an employee has a one-off need, that is far different than employees that might be exhibiting signs that they are unable to manage their money.
- Set clear expectations with your employees on how the loan must be repaid, and by what date. Make sure that the terms offered to one employee are the same as what is offered for other employees.
- Employees should be expected to sign a promissory note that details the loan details and repayment terms including the amount of the monthly payment, the payment frequency, the interest rate, and consequences if the employee defaults on the loan.
- Ensure that the loan is properly documented on the company books so as it does not appear as though employee repayments are actually business income. Make sure to document the terms of the loan in the employee file, and with your finance department for proper recordkeeping purposes.
- Assign an interest rate that is in accordance with the Applicable Federal Rate (AFR) provided by the Internal Revenue Services (IRS).
The benefits of employee loans for employees
If you are short on cash but don’t want to pull money from a credit card or a longer-term loan from a financial institution, an employee loan can be a great alternative. And if your employer offers these benefits, it can be a real boost to how you feel about your employer. Though there are many benefits to employee loans including the ability to prevent a drain on your credit cards or to pull early from your 401(k), you need to ensure that you are making a wise decision on why you need the cash, and how you are going to do it.
In order to get an employee loan, you will likely need to inform your employee of why you need the money and how you are going to use it. Before you disclose that information, you want to ensure that you have thought through the situation and that you are confident that you can repay. The last thing you will want as an employee is to be unable to pay back your employer. Not only will this be uncomfortable for you, but it will also be uncomfortable for your employer, and it may cause your employer to question whether or not they want to offer such a program in the future.
This all said, provided you feel confident in why you need the money and, in your ability, to repay, employee loans are great alternatives over payday loans.
- Taking money from your own future pay can help to alleviate stress, as you are simply taking an advance payment of funds that you have committed to earning.
- Employee loans provide you with options to solve for short-term cash needs without jeopardizing your credit score or financial agreements with other lenders.
- These loans can help set you on a path to wise financial decision making as you make the appropriate adjustments in your lifestyle to enable you to pay for your loan and take care of your short-term needs.