Key Things to Consider Before Loaning Money to Employees

Editorial Team / Posted On: 23 November 2022 / Updated On: 2 December 2022 / Human Resources General / 15

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Key Things to Consider Before Loaning Money to Employees



Besides job satisfaction and career advancement, employees want to work in companies or organizations that support their needs, including financial stability. Being able to support your employee’s needs is crucial since workers often tend to quit their jobs or apply for bad loans when they’re faced with financial difficulties or their income isn’t enough. However, there’s a solution to this problem: employee loans.


Instead of letting your employees leave their jobs to seek higher-paying employment elsewhere, you can consider lending them the money they need at more favorable terms. While your employees can get instant payday loans from a reputable online lender like My Canada Pay, offering them loans can help improve employee productivity and foster loyalty to your company.



However, before you offer employee loans, there are a few things you should do to ensure your workers understand the rules and the related expectations. Here are some of the important things to consider before lending funds to your employees:

 

1. Loan Amount

Besides deciding the circumstances under which an employee can apply for a loan, you also should determine the amount of loan they can take on. You need to know whether the loan you offer will be a fixed amount or a percentage of their income. Some employers offer loans to their employees based on their employment status or financial records. Establishing eligibility criteria can help employees know whether or not they qualify for a loan and how much they can apply for. Make sure you put aside some money for the loan program.

 

2. Repayment Terms

If you decide to offer employee loans, you need to determine the repayment terms. This involves determining how the employees will pay back the loans they take and how much interest they’ll pay. This can be through salary or paycheck deductions. You can also organize alternate payment methods before their job status changes. Your goal should be to ensure you get timely payment or prevent employees from quitting their job without fully repaying the loan.

 

You also should decide the amount of interest to be paid. For loans exceeding $10,000, charge an interest rate equal to the Applicable Federal Rate (AFR). Not keeping track of the AFR and improperly issuing loans can lead to additional taxes.

 

3. Default Terms

Beyond determining repayment terms, you need to know what happens if an employee defaults on the loan, their employment is terminated, or their hours are cut. List down all circumstances in which you may have to reduce the interest rate or extend the repayment period. For instance, if an employee is struggling financially, you may allow them to negotiate repayment terms to make it manageable for them. Similarly, if they resign without fully repaying their loan, you can form new terms to ensure you recover the unpaid loan amount.

 

Endnote

As a small business owner, you should sympathize with your employees when they face financial difficulties by extending loans to them. If you decide to offer employee loans, considering the above things will help ensure your loan program goes as smoothly as possible. Having clear policies and procedures can avoid confusion and help your workers understand their options and limitations when seeking a loan.

 


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