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► Pros And Cons Of Offering Employee Loans

Has your organization considered offering employee loans as a benefit? Given the number of people in the United States who live paycheck to paycheck, there are a lot of employees out there who are one emergency away from needing financial assistance in some form.

Many employers have opted to offer employee loans as a benefit that can help employees in case of financial difficulties. That said, there are definite pros and cons to offering employee loans. Let’s take a look at a few of each.

Offering Employee Loans—The Pros

Here are some benefits to offering employee loans:

  • This type of benefit can show employees the employer cares about their well-being. This can help with recruitment, as it is a benefit potential employees may value.
     
  • If all goes to plan, offering this benefit can be a great way to improve employee retention and loyalty to the organization.
     
  • Helping employees get through difficult financial situations may ease their overall stress levels, which can help the employer by increasing overall productivity. It can also lead to a reduction in absences for those dealing with financial situations.
     
  • An employer may be able to offer more favorable terms than other lenders, which can benefit employees. (Also, some employees may not qualify for traditional loans, making employee loans a source of help when no other help is available).
     
  • Employees also like this benefit because payments can be made through automatic payroll deductions, making them simple.
     

Offering Employee Loans—The Cons

Here are some potential drawbacks to offering employee loans:

  • Offering a loan may come with the same legal requirements as being a regular lender, such as subjection to consumer credit laws, representing an additional administrative burden and associated costs.
     
  • Employers cannot simply assume they will be able to deduct the full amount remaining due from an employee’s pay if an employee with a loan leaves or is terminated before the loan is fully repaid. This could mean a high risk of default.
     
  • There may be tax implications to be managed, depending on the details of the loan terms and how the loan is administered.
     
  • There’s a risk of resentment if an employee does not meet whatever eligibility requirements the employer sets.
     
  • Getting involved in someone’s financial life may result in the employer’s enabling problematic behavior, depending on the need for the loan, exacerbating problems in some situations.
     
  • Employee loans are one more area employers have to be very clear on in their policies and consistent in their behavior of in order to prevent accusations of discrimination. While this isn’t a reason not to provide them, it’s one more consideration.
     
  • This type of benefit can overwhelm the employer in difficult times, especially if loan limits are too high, causing more of a financial stretch than anticipated.
     

Bottom line

If an employer chooses to offer loans, it should have a policy that clearly outlines when and how such payments will be made. Such a policy will help ensure consistency across departments, steer clear of inquiries into matters that are protected by law or could lead to lawsuits (such as specific medical conditions that are causing the employee the financial hardship), and prevent discrimination claims. Finally, be sure to have the policy (and written loan agreements with employees) reviewed by a lawyer to ensure compliance with all applicable laws.
 

By Bridget Miller [edited by Nancy McDermott, J.D.].  Ms. Miller is a business consultant with a specialized MBA in International Economics and Management and is a guest columnist and writer for BLR and HR Advisor.

[5/2020]

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