Navigating personal financial challenges can be daunting, but for many employees, one potential solution lies within their workplace. We are talking about the employee loan, which refers to the contractual arrangement between the employer and the employee. The employer provides the employee with a certain amount of financial resources for their personal use, and the employee promises to repay the amount once another employer employs them.
Anyone considering getting an employee loan should comprehend the process and its implications for the commercial field. Let us help you get a suitable loan from your employer and cover your unexpected needs.
Can an Employer Loan Money to an Employee?
Before we get started, it is perfectly acceptable for an employer to make a loan to an employee. Corporations are known to do this more often than many consumers could fathom. Thus, it is worth prescribing some essential rules to be observed. It includes, for instance, the fact that the loan agreement should be clear and non-oppressive and that it should not violate any labor relations or tax laws, if any.
Unlike traditional loans, where you ask yourself, “Do lenders call your employer?” These employee loans are much easier to obtain. The idea is not to have any entanglement resulting from misunderstanding or a legal issue.
How Do Employee Loan Programs Work?
If the employer provides employee loans, they might be intended for your company. The process is often similar to a traditional personal loan: You fill out the loan form and expect the lenders to accept your application. Once you get the approval, you receive your cash in your bank account. Repayment is normally done through deductions from the salaries of the persons taking the loan.
Loan terms and amounts depend on the employers who offer employee loans. For instance, Equifax’s employee loan program allows employees to borrow between $1,000 and $35,000, depending on their earnings. On the other hand, the Virginia State Employee Loan Program (VSELP) has a slightly smaller limit, a maximum of $500.
Generally, all types of employee loans are advantageous thanks to their lower interest rates than other products such as personal loans, credit cards, and payday loans. For instance, Equifax’s program has APRs starting at as low as 5%, making it sensitive to changes in interest rates.
Pros & Cons of Employee Loans
Before getting a suitable employee loan, you should weigh the pros and cons:
Pros
- Low or No Interest: Employee loans are, to some extent, usually offered among other perks and benefits, and they are considerably cheaper than numerous payday and personal loans. They are normally cheaper; sometimes, you are not required to pay even a dime in interest.
- Potential Credit Score Boost: The loan thus acquired is normally documented at one of the three primary credit-reporting agencies. Paying on time and more often than the agreed-upon time may positively influence your credit rating. However, on the flip side, nonpayment history is also captured in the credit bureau reports. Missing loan payments are not good for your credit score.
- Small Loan Amounts Available: If you urgently need to borrow a small amount of money, such as several hundred dollars, employee loans are preferable to costly payday advances. Most personal loans, from the best online to the best local institutions, have a minimum financing limit of $1000 or above.
Cons
- Strict Eligibility Requirements: Many employers have established certain requirements that an employee must fulfill to be approved for the employee loans. These include a period of service clause, which states how long the employee should serve in the company, or an income requirement, which states how much the employee must earn.
- Potential Fees and Costs: In addition to interest rates, one might face additional charges such as application and late fees.
- Reduced Paychecks: This is a payroll deduction, so employees can always make repayments on time. However, the money is deducted from the employee’s pay, leaving them with little money for other expenses like the house rent or water bill.
Common Types of Employee Loans
Now, it is time to sail into the sea of employee loans and focus on the most popular types. Here’s the lowdown:
Vehicle or Auto Loans
You require a new car to go to work, or perhaps your car has finally died on you. Your employer often gives it to assist you in acquiring a new car without going through the entire process of contracting a bank to get such employee loans. They often have comparatively low rates of interest coupled with reasonably favorable terms because your boss desires you to get to work without worrying about car loan payments.
Transportation Loans
In contrast to auto loans, transportation loans can be used for various travel needs. Perhaps you depend on the bus and could use the extra money for a monthly pass, or you’ve been considering a bike to get around the town. These loans are absolute lifesavers for ensuring you have a dependable means of getting to work, whether that’s your side hustle or whatever. It is more or less an appeal to order and to ensure that your trip to work is as hassle-free as possible.
Unsecured Personal Loans
If it is something a little more personal or something you did not plan for, the loan that would cater to your needs is an unsecured personal loan. Unlike auto or transportation loans, these aren’t secured by the guarantee of something special. You can use them for the hospital bills, some plumbing or paintwork around the house, or to book a spontaneous trip because, let’s face it, we all sometimes need a vacation.
These types of employee loans do not come with any form of security; therefore, no car or house has to be produced to offer employee loans. They may have slightly higher interbank interest rates because they are unsecured.
What is an Employee Loan Agreement?
An employee loan agreement is a legal document that outlines the details of an employee’s cash advance by their employer. So, imagine a common temporary agreement where friends borrow money. Again, nothing is written, and the money is, in fact, a gift.
Here are some key things that you’ll typically find in an employee loan agreement:
- Loan amount: This is just how many dollars the employee will lend from the organization.
- Repayment terms: These outline when and how the loan will be repaid; this depends on the agreed-upon plan between the employer and the employee.
- Interest rates (if any): In some cases, the company can make the loan attract interest, which is not good for the borrower. This section will establish whether there is any interest and, if so, the extent of the interest.
- Consequences of default: In this segment, the company delineates measures that are taken when the employee is unable to meet the stipulated payments for employee loans.
Employee Advance vs. Employee Loan
Employee advances and loans are two common situations in which your employer can give you money before you would otherwise be paid, but they are quite different. Here are several differences to check:
What Is an Employee Advance?
An employee advance is simply – a method through which an employee acquires part of their salary before the standard time of payment. It is as if telling the boss, “Sir/ma’am, can I please receive some of my pay today instead of waiting until the end of the week?” Money is given out quickly, and it is some sort of an early borrowing of money that you are likely to make shortly through your job. But it will deduct a portion of your next paycheck; therefore, you must plan well to use the remaining money.
What Is an Employee Loan?
An employee loan program is a situation in which your employer provides you with a credit facility against a repaid loan, understanding that it will be recovered from the employee’s subsequent salaries.
You can apply for an advance if you need a small sum as soon as possible and do not want any interest or a long-term repayment period.
How to Ask for a Loan from Your Boss?
If you don’t know how to discuss with your boss about a loan, check our advice:
- Gauge the Situation: However, precautions must be taken before making the request, such as ensuring it is the right time. It’s still important to check in with your boss before approaching, and if your boss is stressed or very busy, it is ideal to back off a little bit.
- Be Prepared: When anticipating expenses, it is important to know the exact amount that will be spent and why. To do this, be prepared to say something concise and truthful about yourself and your predicament.
- Pick the Right Moment: Talk to your boss one-on-one, after the meeting, or when people are more free, like during lunchtime.
- Be Honest and Direct: Try to begin with “Hi” and then continue, “Excuse me, I want to convey something urgent to you, so can we have a few minutes of conversation?” After that, state your case as logically and calmly as possible. “Well, to be quite honest, I have been struggling a little financially. I was wondering if I could get a loan.”
- Show a Plan: Choose a financing option and give details of how you will use the borrowed amount to pay back the loan. “Per month, I can start repaying you next from the paycheck.”
- Be Grateful: In any case, thank you for taking the time to consider it. “This I wanted to say, even though I know you have listened and considered this, I am grateful.”
Conclusion
When obtaining an employee cash loan, one does not have to worry about sore heads. As long as you are up-to-date with your company’s stance on such business matters, collected all relevant documents, and have clarified your reasons for the loan, you should be fine. It can be said that it is crucial to always read the small print and ensure you comprehend the particular repayment schedule that is included in the contract. Don’t be shy to speak to your boss if you have issues; they are supposed to help.
Guest writer.
