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May 19, 2020
Pros and Cons of Offering Employee Loans

By Bridget Miller, Contributing Editor

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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.

If your organization has offered employee loans, what has your experience been? Did you utilize legal services when setting up your employee loan program?

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.

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