3 Things To Consider Before Taking Out Employee Loans

As an employer, there are times when your employees face emergencies and financial difficulties. To keep an excellent employer-employee relationship with them, you have to show them that you care about their financial wellness and are ready to do what it takes to help them with their difficulties.

Life can happen, and its adverse effects can disrupt your employee’s finances. Their income might not be enough to settle for their basic needs. It is natural for them as human beings to seek ways to balance their financial life. They need to source income that will be enough to settle their bills. Many will seek jobs that pay better, and as an employer, you would not like to lose your talents to your competitors. Hence, you must provide them with another option to guarantee their stay in your company and solve their financial problems.

A good option is to provide them with employee loans. Providing your employees with low-interest loans to solve their financial needs will increase your chances of enjoying their long-term commitment. With this, your employees know that you care about their financial wellness and will pay your care back with their loyalty.

What are employee loans? What are the things you need to consider before lending out employee loans? This article will help you understand the basics of employee loans and know how to enjoy the full benefits of employee loans.

What Are Employee Loans?

Employee loans are loans given to employees in an organisation by their employers to help them in their times of need. It is a form of providing financial assistance by employers to their employees to help them lift the weight off their financial burden.

With employee loans, your employees can borrow funds required to solve their financial needs like medical emergencies, house rent, tuition fees, car maintenance, etc. They can solve their emergency needs with the low-interest loan you offer them, which they can repay during their salary periods.

Pros And Cons Of Offering Employee Loans

Employee loans come with many benefits for the employer and the employee. Likewise, some cons come with lending out employee loans. Below are some pros and cons of lending to employees.

Pros of offering employee loans

1. Improved work performance and high employee retention rate: One of the leading causes of low performance by employees in a workplace is the lack of ability to focus on work activities due to financial problems they are facing. Offering employee loans to help your employees solve their financial issues will help clear their worries and allow them to focus on their assignments at work for productivity.Apart from the fact that employee loans help to ensure high-level performance at the workplace, they also help increase employee retention rates. Your employees will have no reason to seek other jobs if you can solve their financial issues.
2. Financial security: Consistent repayments of the loans you give out to your employees with interest will positively impact your company’s cash flow. Employees will also enjoy access to funds to help their cash flow during financial downtimes and keep their finances healthy.
3. Affordable financing option: The cost of getting employee loan funding is affordable to employers compared to getting loans from traditional loan sources. The loans also come with a very low-interest rate, making them attractive to the employees.

Cons Of Offering Employee Loans

1. The risk of loan defaulters: Some employees might be unable to repay the loans they collected for one reason or another. It might be a financial setback, or they may stop working at your company. Providing default terms in your employee loans collection policy will help control the risk of loan defaulters.
2. The risk of conflict in the workplace: Employee loans can create a conflict situation in the workplace. This kind of conflict happens when employees start feeling inequity between those offered the employee loan and those who have not. To prevent conflicts of this nature, you must create a good policy that guides the collection of employee loans and create an avenue to educate your employees about the policy consistently.

Key Things To Consider Before Giving Out Employee Loans

Before you let loans out to your employees, there are some essential things you need to consider to avoid unnecessary downsides in the future. Below are the top three things you should consider before lending out employee loans.

• Loan Amount: Some factors must be considered when determining the loan amount to let out to an employee. You need to know if the hardship the employee faces warrants the loan they request. You need to determine if the loan will be granted considering the employment status, based on the employee’s income percentage, or other factors.
• Repayment Terms: You have to determine how the employees can repay loans. Will it be deducted from the employee’s salary? Is there an alternate payment method the employee can use to repay the loan? You need to answer these questions when you seek to offer loans to your employees.
• Default Terms: What happens if the employee resigns? Will they pay the loan in full, or can they pay in instalments? What happens if an employee delays the repayment? The employer must know these before giving out employee loans.

Endnote

Lending out loans to your employees can be a great deal as it helps keep the employer-employee relationship healthy and ensures workplace productivity. However, as an employer, you should consider placing some policies in place guiding your employee loan offerings to prevent you from being affected by the downsides of it.

You must ensure you give the loans to the right employees whose financial hardship requires your intervention and who are in a good place to repay the loan.

At Earnipay, we offer employee loans to business owners to help their employees’ loan needs. You can check out our website at earnipay.com for more amazing financial services for your business.