More than 78% of Americans are living paycheck to paycheck. That means it’s only a matter of time before one of the employees of a small business will need financial assistance. But who can they turn to? When everyone else in their immediate family and close friends is living paycheck to paycheck, too, from whom are they going to ask for help? A majority of them turn to financial institutions such as banks, but not everyone will get approval.
So, where can they turn to if they need to pay their home loans? If they don’t want to refinance their mortgages, how will they pay off their loans? Employers can be lenders, too. One of the benefits of employment is having access to an employee loan (if the company offers it).
Employee loans is money advanced by a business to an employee. They have lower interest rates compared to bank rates. The interest charge usually covers administrative fees and tax liabilities. But similar to typical loans, they have a repayment schedule, too. The employees have to pay the loan according to the repayment schedule.
The employers usually deduct the payments from the salaries of the employees. This is why this type of loan is most popular among employees. They think of the loan as an advance on future earnings.
But Should You Offer a Loan to Your Employees?
Offering a loan shows employees that the employer cares about them. When recruiting top talents, this can work to your advantage. It is a benefit that potential employees may consider when choosing the company to work for. If you are in an industry where companies are competing for top talents, this is an advantage that you need.
Once you hire them, these kinds of benefits will also make employees want to stay. It can improve employee retention. Certainly, employees will want to stay with employers who care about them and who value their well-being. They will be more confident about their decision to stay with your company. They know that they can count on you if they need financial assistance in the future.
Another reason why businesses should consider offering employee loan is its role in their productivity. Employees who are less financially stressed are happier and more contented. And you know what they say, right? Happier employees are more productive. They can deal with work issues better when they don’t have to worry about their financial situation.
Most employers offer more favorable terms compared to other lenders. This makes this type of loan more of a financial assistance than a business. Of course, the employers will still gain from the interest the loan incurs, but the primary motivation should be to help employees.
For employees, applying for a loan from the employer is easier and faster. The employer, acting as a lender, will ask for fewer requirements. They already have the personal records of the employees. They also know how much they are earning. This allows for the faster processing of the loan. Employees can pay for the loan via salary deductions, making it more convenient for them.
Consider These Things When Creating an Employee Loan Program
The policies and guidelines of the employee loan should be very clear. That will help the employees decide if this is the right loan for them. It will also help the employer process and determine whether to grant the loan or not.
Conditions of the Loan
Who will be eligible for the loan? Is every employee eligible for the loan, or do they have to stay with the company for a certain period first before they can apply for a loan? Are you going to require additional documents? These are some of the questions you have to answer when building an employee loan program. These things will also help the employees determine their eligibility for the program.
How about the loan amount? How much do you have to set aside for the loan program? Does the loan amount depend on the salary of the employee? Is there going to be a threshold? Smaller businesses may not be able to provide a big loan amount. At most, employee loans can cover minor financial setbacks such as those due to medical expenses and college tuition.
Payroll deduction is the most common type of repayment method for an employee loan. But before you finalize the terms of the loan program, make sure that your state allows it. Also, check the possible terms for the loan. A two- to three-year term is usually typical for these kinds of loans. This is enough time for the employee to pay the loan. You can’t offer a longer-term than that because what if the employee decides to leave the company?
Always consider your capacity as a business to provide the loan. While you only want to help your employees, it is important to protect your business, too. Whatever you choose to do, think about how it will impact the business, employees, and the work environment.