Sometimes the unexpected happens. Your car breaks down, the roof starts leaking, a family member has a medical emergency. All these sudden incidences need fixing straight away. But they can be costly, and if people don’t have savings to fall back on, things could start to become very complicated, very quickly.

In circumstances like these employees who need cash quickly may not have many payment options. While some people may be able to turn to their bank for a loan, others may not be eligible for this type of loan because of:

• A poor credit score: Employees who have low or no credit history are generally viewed as “high risk” by banks. This means the bank will have little confidence that the employee will be able to pay back the debt.
• No collateral: Typically, a bank will require some form of collateral for a borrower to secure a loan — for example, real estate or a car. If your employee has no collateral, then he or she will most likely be turned down for a loan.

The Risk of Predatory Lenders

Employees who need quick loans are vulnerable to predatory lenders. Predatory lending refers to any lending practice in which the lender benefits at the expense of the borrower. Warning signs include:

• An offer that sounds too good to be true: Many predatory lenders claim that they can fix a person’s credit score or settle debts for less than they owe. However, the truth behind these false claims is that borrowers usually getting trapped into a deeper cycle of debt.
• The cost of the loan is hidden: It is a legal requirement that lenders show the APR of a loan up front. But all too often, predatory lenders make it very difficult for borrowers to know how much the loan is going to cost them.
• The lender does not check the borrower’s ability to repay: Unlike traditional lenders, predatory lenders will not ask the borrower about income and existing debts. Additionally, they will encourage the borrower to take out a bigger loan than he or she had originally asked for. The borrower will then demand lump-sum or balloon payments rather than fixed monthly payments.
• The lender demands access to the borrower’s bank account: Lenders are not allowed to do this. However, may predatory lenders require electronic payments. This enables a predatory lender to make a repeated demand for money, resulting in the borrower sliding into increasing debt.

Predatory lending costs American borrowers around $9.1 billion every year. People who live from paycheck to paycheck are common victims of predatory lenders because there is often nowhere else for them to go if they need money in a hurry. The problem is that this type of borrower finds it increasingly difficult to repay payday loans because of high-interest rates, so they often end up taking out another loan to keep up with the payments.

There are other solutions to help employees who need money in a hurry. For example, there are several alternative employee loan solutions which do not trap borrowers into a cycle of debts. These include:

• Paycheck advances: A paycheck advance is when a lender advances money on an employee’s next paycheck. Typically, this type of loan is for a small amount, which is paid back out of the subsequent paycheck whether it is within weeks or a month.

The main benefits of this type of loan are that it’s small enough to pay back next paycheck (typically under $1,000), it’s available immediately, and the employee doesn’t need a credit check in order to obtain it.  

The downside of a paycheck advance is that because they are not regulated, lenders can charge exorbitant interest rates even though the loans are very short term. According to a recent CNBC report, the national average annual percentage rate for payday loans is close to 400%.

• Employee loans: Employee loans, such as those offered by TrueConnect, may be a better solution. TrueConnect partners with employers to offer workers safe and affordable loans when they are suffering financial hardship.

TrueConnect employee loans have a number of benefits over paycheck advances:

• The loan is not conditional upon the employee’s credit score
• All employees are offered the same interest rate
• TrueConnect offers each borrower up to six free financial counseling sessions
• TrueConnect can help prevent employees from getting hooked by predatory lenders

Because TrueConnect cares about your employees and wants to prevent them from falling victim to predatory lenders, we offer safe and affordable financial solutions for employees who need a helping hand.

Employers can offer TrueConnect at no charge to the company. This is a much better solution than allowing your employees to fall prey to predatory lending because:

• It is a manageable debt solution
• The borrower can see the terms of the loan up front
• The borrower will not be lent an amount of money that he or she cannot pay back

Furthermore, employee loans also benefit your company because:

• They improve employees’ financial wellbeing
• Employees who don’t have financial stress are more engaged and more productive
• Employee loans help build trust and loyalty between employers and employees

It makes sense to protect your employees from predatory lenders and to empower your employees with loans that are safe and affordable, at no cost to your company. TrueConnect can help you implement employee loans today.