Employee Loan Guidelines: What You Need to Know
Many U.S. employees are financially unhealthy, with 42 percent of employees saying that they are likely to use money from retirement accounts for other expenses besides retirement. Instead of preparing for the day when they can enjoy comfortable and fulfilling post-work lives, American workers find themselves saving money for medical or financial emergencies. A popular misconception is that financial health is dependent on a person’s level of income – a recent survey indicates that 69 percent of employees are deeply worried about their finances, a concern that seems to transcend earning levels. Although there’s certainly a connection between income and financial security, income alone does not determine overall financial well-being. Other factors include:
- Debt burden
- Regularity of pay
- Savings habits
- Financial planning
One of the main symptoms of poor financial health is limited cash flow, because it leaves little room for mistakes or sudden disruptions when it comes to financial decision making if a worker does not have adequate resources to manage a challenging financial situation, it becomes very difficult for that person to save money, maintain good credit, and build assets.
Three out of five American households experience at least one financial crisis annually. Almost 50 percent of them do not recover for at least six months. Such a crisis can be financially debilitating as it can affect daily essentials like rent, food, and healthcare. Another financial challenge that many U.S. workers face is income volatility—a situation where the amount of income fluctuates and pay periods may not be consistent. This issue does not only affect seasonal or part-time workers; it can affect people who are employed full-time, from sales professionals who rely on commissions to employees working for companies that are financially unstable.
Many American workers are also suffering a large burden from credit card debt and/or student loans. When these debts become hard to manage, employees’ credit scores can be adversely affected. Too often, workers have no other recourse but to turn to low-quality credit options like payday loans.
Why Payday Loans Are So Popular
Payday lending is a big industry in the U.S. There are over 20,000 locations throughout the country that offer payday loans, and an estimated 19 million American households have taken out a payday loan at some point.
As the name suggests, payday loans typically become due for repayment on the borrower’s next payday. They differ from other loans in a number of ways, such as:
- Smaller loans: In most cases the amount a person can borrow is limited. The limit varies from state to state, but typically ranges from $300 to $1,000.
- Shorter terms: A payday loan is supposed to be repaid in full when the borrower gets their next paycheck. Typically, the terms of the loan are for two weeks. In some cases, the terms can be for one month.
- No installments: Unlike a bank loan, payday loans do not have to be paid back in installments. A payday loan must be paid back in full, along with the interest, when it is due.
- High interest: The interest rate on a bank loan may depend on the borrower’s credit score. With a payday loan, all borrowers are charged the same rate, which can be as high as 400%.
- No credit check required: Unlike some bank loans, payday loans do not require a credit check. All that a borrower needs to present is proof of income, a government ID, and bank account details.
- Auto repayment: When an employee takes out a payday loan, they will have to give the lender a signed, post-dated check or sign another document permitting the lender to take the money owed from his or her bank account. If the borrower does not show up to repay the loan as scheduled, the lender will automatically take the money.
- Easy renewals: Often borrowers are unable to pay off their loan on time. In this situation, they can pay an additional fee which extends the repayment date for another two weeks. Alternatively, in some states, borrowers may take out another loan to repay the initial one.
Who Borrows Payday Loans
The people who are most likely to take out payday loans are:
- Young people: More than 50 percent of payday loan borrowers are between the ages of 25 and 44.
- People on a low income: Most people who take out payday loans have an in income that is below the U.S. median household income. According to the U.S. Census Bureau, the median household income for 2016 was $59,039. People who have a household income of less than $40,000 are three times as likely to take out a payday loan as are people who have a household income of over $50,000.
- People who rent their homes: Renters are more likely to take out payday loans than are people who own their homes. In the U.S. More than 36 percent of American adults rent their homes. However, almost 60 percent of payday borrowers are renters.
- People who are disabled or unemployed: Payday lenders have no qualms about letting people take out a loan against their disability or unemployment benefits. Around 1 in 10 unemployed people have taken out a payday loan in the past five years. The rate for disabled people and payday loans is slightly higher.
- People who are divorced or separated: As many as 25 percent of payday loan borrowers are separated or divorced.
Why Payday Loans are Dangerous
Payday lenders target their loans at the most vulnerable groups of people. They tend to market the loans as short-term solutions for emergency situations, such as unexpected medical bills, car repairs, or for covering periods of lost work. However, studies show that most payday loan borrowers do not use the money in these ways. In fact, 7 in 10 payday loan borrowers use the money to pay for basic, day-to-day needs such as food, rent, utility bills, and credit card payments.
The most obvious and biggest problem with payday loans is the extortionate interest rates. Depending on the state where the loan is taken out, interest rates can be anywhere from 260 to 780 percent. Other dangers include:
Renewal fees: If a payday loan borrower is unable to pay back the loan when it is due, he or he has the option to renew the loan or to take out a new one. The problem here is that even though the borrower continues to make payments on the loan, the amount owed may never actually decrease. This is because of the continual interest charges and renewal fees.
Collections: When a person takes out a payday loan, he or she authorizes the lender to take the money directly from their bank account if they do not show up at the payday loan facility to make the repayment. In theory, the payday lender should never have a problem collecting the debt. However, if the bank account has no available funds at the time that the repayment is due, several things may happen.
First, the borrower may be charged with an insufficient funds fee. Second, the lender will likely keep trying to collect the money, often by breaking down the total amount owed into smaller payments which are more likely to be processed by the borrower’s bank. At the same time, the lender may begin to harass the borrower with calls demanding repayment; they may also send letters from retained or company lawyers. If the lender still doesn’t collect the money, the debt will then most likely be sold to a debt collection agency. The agency can sue the borrower for the debt and if it wins, then the agency will be permitted to seize the lender’s assets or garner his or her salary.
Impact on credit rating: Payday lenders don’t usually do a credit check on a borrower before making out a loan. The reason for this is that it’s too costly to pay for a credit check for such small loans with such short terms. However, when a lender fails to pay back a loan, credit bureaus can easily find out about it. Even if the lender does not report it, the collections agency will. This can seriously damage a lender’s credit score if the loan is not paid back on time.
The vicious cycle of debt: Another major issue with payday loans is that borrowers cannot pay them off gradually, as they could a regular bank loan or a car loan. They must come up with the full amount borrowed as well as the interest, often within as little as two weeks. For many payday loan borrowers, this large amount is more than their budget can handle. This forces them to renew their loan or to take out a new one. This can turn into an ongoing cycle where the debt never gets repaid.
What is an Employee Loan?
Employers who want to help their workers avoid the cycle of debt and maintain financial wellness can offer an alternative which can keep them away from payday loans. This healthier and safer alternative is an employee loan.
An employee loan is one administered by an employer to members of the workforce with financial difficulties and in need of assistance to solve their economic circumstances. Research shows that business owners who offer long-term financial security to their employees have less than half of the industry average in turnovers.
Some of the most common situations in which employees might need this type of loan include:
- Saving or paying for children’s education
- Covering basic living expenses
- Paying for medical expenses
What Are the Benefits of Employee Loans for Employees?
- Give an opportunity to assess the current status of their financial health
- Allow them access to financial advice, education, and customized financial tools
- Help map out a route to reach their financial goals
- Help reduce stress
How We Can Help
At TrueConnect we provide resources to help hard-working employees avoid predatory lenders. We also help employers hold on to dedicated personal by offering financial lending solutions that can benefit both parties. Our technology-driven solution is simple to manage and incurs no cost for employers.