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Employee Loans: Should you Borrow From Your Employer?

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Employee Loans: Should You Borrow From Your Employer?

Employee loans are one method to obtain cash in a pinchHowever, do not make them a habit.

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Last updated on Mar 25 2021

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If you’re in a financial bind You might want to request the ability to advance your paycheck Some employers provide this through a third-party as part of their benefits packages.

These loans are a cost-effective option to borrow and can aid in building credit. But they charge interest, and the cost of the early access to your personal money could lead to unhealthy financial practices.

Find out more about payroll advances offered by employers and other options to receive cash fast.

Paycheck advances are made through your employer

HoneyBee, Salary Finance and TrueConnect provide small personal loans — typically up to $5,000 — through an employer’s benefits portal.

These companies look at employment and income data to determine the risk of your loan However, they could also consider your credit. For example, Salary Finance does a to accept borrowers, but TrueConnect claims it does not take into account your credit score when you apply for loans that are less than $5,000. Both of them report payments to credit bureaus, which means paying on time can improve your credit.

Annual percentage rates on these loans can be double-digit. For instance, Salary Finance charges APRs between 5.90% and 19.9%.

Payment terms span from a few months to a few years, and loan payments are taken out of the employee’s paycheck. If you terminate your employment, you’re still responsible to pay loan payments. A company may use the information on your bank account to get the loan repayment, when they’re unable to get it from your paycheck although they’re not saying they’ll work with borrowers who quit their jobs.

Pros and cons of employer-sponsored paycheck advances

Pros

The loan is low-cost and easy to access. With single- and double-digit interest rates they are loans will likely to be less expensive than payday loans, which can have rates up to 400%..

Credit reporting If the lender is able to report your payment to credit bureaus, the loan will allow you to build credit for the next time you want to get a loan. This isn’t the most ideal option when you want to simply get a loan however, but it’s a great benefit over others payday loan alternatives may not provide.

The financial education TrueConnect as well as Salary Finance both offer financial education that will help you comprehend the situation and determine ways to improve it.

Cons

Paying to borrow your own cash: When paying the interest on an employer-sponsored loan, you’re essentially borrowing your own cash.

This isn’t a better offer than more money If your employer provides this benefit as a perk take a look at whether it’s more beneficial than a higher income. If you’re taking advantage of these loans according to consumer advocates that you might be better off searching for an employment that pays higher instead.

Employee loans compare to. loan apps

Loan apps like Earnin and Dave also provide direct paycheck advances, usually up to 100 dollars. Instead of charging interest, these charge the user for subscription fees or tips.

It’s a mobile application that asks for your time sheet . It allows you to cash out up to $500 of amount you earned before your pay date.

You can get a loan of up to $200 if you have a spending account linked to it, or $100 if not, and then debits your loan sum from your bank account on the next payday.

Both apps ask users to contribute a “tip” and offer other features like notifications in the event that your balance is low.

In contrast to employee loans and payday advances, these applications don’t typically check your credit score, and do not automatically report your payment to the credit bureaus.

Like the employee loans These are best used to cover small, short-term emergencies. If you do borrow through them NerdWallet recommends declining the tip.

Loan options for employees loan alternatives

Think about an employee loan as one of the numerous fast cash options available to you. Here are a few options to think about:

Credit unions and banks loans If your bank or credit union provides personal loans which are available, it could be an ideal place to begin. You can get the money within one week, and you aren’t obligated to ask the employer to obtain this kind of loan.

Online loans are also available. Online lenders offer products that are tailored for borrowers of all credit ranges. Even if you have bad credit, you may qualify to receive an online loan depending on other data. These loans can often be funded the same day or day after you’re approved, and can range from as low as $1000.

Check if you are pre-qualified for an individual loan – without affecting your credit score

Simply answer a few questions to get personalized rate estimates from multiple lenders.

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Side gigs: Consider an additional job that can earn extra income. You can earn money opportunities to work as a rideshare driver or take surveys. This may not get you immediate money, but it’s a way to get money without having to pay for it.

The lending circles could form a with some family members or friends. In these circles, everyone pitches in some amount of money each month, and one person gets the entire pot. This is a long-term commitment however, it could come in handy in the event that an emergency expense arises.

Borrow from a family member or friend It’s not always easy to , but it’s one option to keep your credit score and receive a fair shake. If you and a friend or family member can even draw up an agreement that contains conditions for repayment as well as interest.

Preparing for next time

Before you take out a loan the next time, think about creating an initial budget that has some room for savings, desires and requirements. NerdWallet suggests the , which allocates some of your paycheck to savings. A goal of $500 in an emergency fund is a good starting point.

All your money is in one spot

The NerdWallet app tallies up your expenses and shows you the amount you spend on things like bills, food, travel and more. It will also show you ways to cut costs.

About the authors: Amrita Jayakumar was a writer for NerdWallet. She has previously worked for The Washington Post and the Miami Herald.

Annie Millerbernd works as a personal loans writer. Her work has appeared in The Associated Press and USA Today.

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