HR Management: Are Employee Loans a Wise Decision?

Isn’t it but logical? As employees earn their keep by working for the company, would it not be timely to take out a loan from there? There are a hundred and one reasons that anyone will feel the urgency to immediate access to cash. For one, there’s the untimely sickness of a loved one. Or worse, an employee could be grieving with a spouse succumbing to the virus. With the fatality numbers reaching over 600,000, such a possibility isn’t far-fetched.

But what of the practice of lending money to employees?  Come to think of it, lending personal money to an employee is a personal decision. That should not constitute a company issue. Your money is your discretion. Nonetheless, a loan as a means to help employees is a different ball game altogether. It can open Pandora’s box if you’re not careful. And that should be your cue.

Employee loans, therefore, should be taken with due diligence. It cannot be an offhand decision. If you chose to or not to engage in it, you should mirror your decision to the overall health of your business. That means you shouldn’t undertake such without discussing its merits thoroughly.

Fortunately for you, having an expert take on the matter should be timely. Keep in mind there are many ways you can help earn the loyalty of your workers other than lending them money.

Foster Loyalty

Given the choice of a company that offers employee loans and one that does not, an employee will likely choose the former over the latter. That’s a simple fact. Workers who have been helped in times of need will certainly feel more loyal. They’re likely to stay with you and stick around.

That can mean employee loans can foster greater loyalty from your workforce. Knowing their company has its backs in times of need is a strong motivation for people to identify with the company and take ownership of their work. Many who are not as loyal won’t go beyond what’s expected of them at work, producing a so-so quality of work rather than a stellar output. But loyal employees work harder and produce more even with similar pay grades.

In a sense, you also save a lot of money when you foster employee loyalty. To note, the cost of hiring a new employee to replace one that has left can be astronomical. That includes months of training which means such cost is more than the actual salary.

Greater Focus

It’s tough to focus on quality work when you’re in the middle of a family emergency. With medical bills piling on top of one another, a worker can have a hard time putting up needed productivity. In which case, an employee loan can certainly be a great boost to help him make it through the bad times. By extending help, you minimize his burden allowing him to regain focus on the work at hand.

Repayment Issues

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Careful though, an employee loan is not an automatic guarantee that it can help the worker. On the contrary, it may make the employee’s situation worse. This is especially true when the loan is used to pay a recurring monthly obligation such as monthly rent or mortgage.

So you should look into the nitty-gritty of the worker’s situation. If he already has a hard time paying his monthly obligation, adding another financial burden to that pie would only make the matter more problematic.

Take note that it’s the employee’s primary obligation to pay the employee loan. If he reneges on his monthly dues, things can certainly add up.

In comparison, when someone takes out a Veteran Affairs loan, assuming eligibility, the office of the U.S. Veteran’s Affair will provide insurance to lenders. This means government assures private lenders that the loan will be paid if the person can no longer make needed payments. In short, the government has your back if you have this type of loan, which is usually made to buy a new house. However, note that VA loans are only available to active military on duty, a veteran, or their spouses.

A Contentious Issue

Discrimination is another contentious issue that you should be careful about. It’s essential that you lay out the criteria for approving an employee loan or not. There may be workers who are eligible for the loan and workers who are not.

The problem is if you have not been very straightforward about your parameters in approving loans, you could open yourself up for discrimination lawsuits. It’s important, therefore, that you document the actual reasons why a request for a loan is turned down to protect yourself.

Greater Tax Obligations

There’s a good chance you’d be up for greater taxes if you don’t do the employee loan the right way. To do away with such, make sure you declare the loan terms clearly. Also, you’d have to make sure the interest of such loans is within the limits of federal rates, and it must eventually be reported as income. If not, you could be facing more tax obligations or, worse, sued to court for doing something illegal.

Make sure you set the favorable repayment terms early on to avoid confusion. In this regard, you can have a portion of the employee’s check deducted automatically.

As for the decision to extend an employee loan, that is a company decision. Look at your financial health if it’s viable. Additionally, make sure you set the standards clearly for any employee to avail. If done well, an employee loan can be a great way to move your company forward.

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