Dissecting Short Term Employee Loan Programs
Stress caused by money problems has been shown to stifle work productivity in employees, with one recent study finding money woes can create decreases in work productivity equal to almost 15 missed days per year. As more and more Americans struggle to live paycheck-to-paycheck, companies and government offices are turning to short term employee loan programs to help workers fill pay gaps and better manage household finances.
Employee loan programs are typically set up through company benefits packages. Small dollar loans are provided to employees, and payments are deducted directly from the employee’s paycheck . Fees and interest are kept low because many of the major cost components for employee lending are inexpensive (informally advertising through Human Resources, bypassing expensive marketing/lead generation) or non-existent (automatic payroll deductions eliminate collections).
Although companies have informally lent money to employees through payroll advances and handshakes for generations, the modern formalized use of employee loan programs dates back only a few years to a small pilot program at a small Minnesota bank under the watchful eye of federal regulators. Some tribal business entities have even established similar programs.
Consumer advocacy groups have raised concerns recently that employers still need rigorous ability to repay standards, similar to the requirements in the Consumer Financial Protection Bureau’s Small Dollar Rule, to ensure employee loan products are a responsible form of credit.
In some instances, the loan programs have aided employers in identifying employees with financial issues, so financial institutions open financial literacy and education programs to those employees most needing assistance. A federal study noted that such programs likely improved employee commitment and may have even helped with employee retention.
Despite the growth in employee loan programs, the employer-initiated credit products are unlikely to replace other forms of small dollar credit. More than one-third of the American workforce functions as an independent contractor. Over half of the working population in America is employed by small businesses, but the vast majority of those businesses (22 million out of 28 million) are sole proprietorships. There are also potential tax implications and loan discrimination concerns that the average employer will likely see as too much liability for too little return.
While employee loan programs may be an effective tool for employers to promote financial literacy and goodwill in the workplace, the programs’ limited applicability, low returns, and potential liability should restrict the expansion and effectiveness of such programs to institutions with greater financial savvy (banks, credit unions) and large pools of long-term, salaried employees (government offices).