Payroll

Employee Loans as a Component of Financial Health and Wellness

February 25, 2021

Employee loans are one of the fringe benefits employers may offer to employees. Here are some considerations before lending.

Employee Loans Cover Image 1

The topic of financial health and wellness was trending a year ago.  Before the pandemic, debt elimination seminars and workshops were all the rage.  Now, the once hot topic may feel more like a future aspiration than an immediate possibility for many employees.  This is especially true if you are receiving inquiries about employee loans.

While we’ve talked a lot this year about small business loans through the PPP, it’s only right to think about what employees are going through, too.  So, here is what you need to know about employee loans.  However, before going down that road with your employees, there are some other things you might want to consider.

Why might employees need loans?

While cash is certainly king, the modern immediate-gratification mentality of our culture has kept us racing to keep up with the Joneses, and often in deeply in debt.  Most Americans borrow money at some point over their lifetime.  There are different ways people borrow money, and those ways typically align with a certain need.  Common types of loans include the following:

  • Bank loans – People often borrow from the bank for cars, houses, and other big-ticket items.
  • Lines of credit – This type of loan can be something as big as a HELOC (home equity line of credit) or as small as a credit card, and can be used for debt consolidation, medical bills, weddings, etc.
  • Government loans – Borrowers turn to the government for things such as education or to help support a small business.
  • Employee loans – Employees seek financial assistance from their employer for unexpected, smaller costs.  For example, unusually high utility bills, etc.
Image of the word BANK on a sign, as one alternative to employee loans.
Photo by Marc Moz | Source | CC by

If you are fortunate enough to never have to borrow money at any point in your life, you are in a very small percentage of the population.  Congratulations!  Still, remember that to whom much is given, much is expected in return.  Giving back can be as simple as recognizing that not everyone’s circumstances are a result of poor money management.  So, tread lightly and be careful not to judge as you aim to help your workers decide what is best for them as they consider employee loans.

What are alternatives to employee loans?

Before you go down the road of loaning money to employees, here are some questions to consider.

  1. How much money does the employee need?
  2. Is this a one-time occurrence, or will the employee need to continue to borrow?
  3. Has the employee considered other options besides borrowing money to make ends meet?

Now, outright asking these questions to your employees isn’t advisable.  In fact, asking about debt and money management during an interview is a big no-no.  However, putting these questions in front of employees could be a great chance for a team-building lunch-and-learn on the topic of financial health and wellness.  In other words, be proactive!  Rather than cornering one employee and asking that person if he has considered all his options, make this an educational opportunity for all employees.  That way, employees will feel empowered to consider all options before ever inquiring about employee loans.

Related:  Payroll Mistakes: How to Avoid and Fix Common Errors

What types of things could be included in a financial health and wellness seminar?

There are countless topics you could include in a financial health and wellness seminar.  However, if you are specifically trying to provide ideas for possible alternatives to employee loans, here are a few to think about.

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Budget

First, if employees need loans, it’s possibly because they are having a difficult time making ends meet. There could be many reasons for their financial hardship.  It could be that they simply fell on hard times.  It could also be that they have poor spending habits.  However, it could simply be that they don’t know how to have good spending habits because no one ever taught them how to create a budget.  So, a good rule of thumb is to always start with creating a budget, and then discussing how to stick with the budget.

Return/Sell

Second, depending on how big the gap is, sometimes an employee doesn’t need a true loan—they just need a little extra cash to get by.  In that case, there is something many people don’t think to do: return or sell something.  For example, many people make purchases, then forget to return what they decided not to keep.  So, if items are still in returnable condition, and are within the returns window, get them outta the house!  That will be instant cash, or at least store credit that you can save for a future need.  If the items are not within the returns window, there’s a pretty good chance someone on eBay will want it.  Again, instant cash, once it sells.

Gift Cards

Third, many people receive gift cards for birthdays or other holidays.  However, those small pieces of plastic often end up tucked away in a drawer, purse, or pocket somewhere.  Nowadays, gift cards rarely expire, so that is potentially a lot of money just waiting to be spent.  It could even be the difference between needing employee loans or not.  So, send out a search party to find those unspent gift cards!  Then, use them for things you need in order to free up some cash for the costs that are putting you in a bind.

Retirement Plan

Finally, it’s likely that many of your employees are contributing to a retirement plan, if you offer it through your company.  Some employees actually forget the money is there!  While the purpose of the retirement plan is not to be a rainy-day savings account, it is still an option for being a life raft when times get tough.  Employees have options here, including cashing out or borrowing from the retirement plan.  Be careful with this, however, and make employees aware that there are steep fees associated with both options.

While these may not be a perfect solution for everyone, they are creative topics employers can discuss as alternatives to unnecessarily applying for an employee loan.

Related:  Small Business Taxes

What is the best way to give employee loans?

Still, despite one’s best efforts to circumvent borrowing money, some people simply may not have another option.  Therefore, if you choose to provide employee loans as a fringe benefit to those eligible, you need to thoroughly investigate the topic.  In order to avoid pitfalls when loaning money to employees, here are some things to remember.

  • You are becoming more than just the employer—you are becoming the lender, and that can change the relationship.
  • Do not discriminate when lending money.  Be sure to practice fairness when deciding who gets approved for employee loans and who doesn’t.
  • The employee loan is more of an advance than a loan, since the employee’s future paychecks are essentially collateral.  However, this can become problematic if the employee leaves and doesn’t repay the loan.
  • The employer needs to have a clear, written employee loan policy. Items to include in the policy are the approval process, the loan amount, the interest rate/fees, the term of the loan, and the repayment method.
  • Be sure to make the loan official with a promissory note.  Not taking this precaution could make you liable for the loan amount, should the employee default.

As you can see, there are many things you need to remember if you decide to essentially become a lender to your employees.

Employee Loans May Be Necessary for Financial Health and Wellness

Be mindful of the fact that our nation is in a different place financially than we were a year ago.  At the end of the day, your employees’ financial health and wellness ranks right up there with their physical and mental health.  This is not a one-size-fits-all topic, where you can make one suggestion or give blanket advice and have it work for everyone.  Each individual’s life circumstances may dictate what an employee needs and when. 

So, be a resource to help your employees know what their options are before applying for employee loans.  Then, should they still need to borrow, make sure you are lending fairly and in a way that reduces risk and liability.  Don’t forget—if your employees are financially healthy, it will be reflected in your workplace.

Photo of a Pepto bottle, headache medicine, dollar bills and coins, and a pen and checkbook.
Photo by Christine Yanner


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