Employee Loan: What It Is and Should You Get One?

An employee loan is a loan provided by an employer. These types of loans aren't offered by every employer, and they can differ widely in terms of eligibility requirements and other specifics. But if you need to borrow money and don't qualify for a personal loan, or simply want to explore other options, it could be worth asking about an employee loan.

How an Employee Loan Works

If your employer offers employee loans, they might be tailored specifically for your company. But the process can be similar to that of a traditional personal loan, where you complete a loan application, wait for approval, and, if approved, receive the funds in your bank account. Typically, you will repay the loan over time with money deducted from your paycheck.

Loan terms and amounts will vary by employer. For instance, Equifax has an employee loan program that offers loans ranging from $1,000 to $35,000, depending on the employee's salary. The Virginia State Employee Loan Program (VSELP) has a $500 maximum.

While employee loans often charge interest, their rates tend to be lower compared to other borrowing options, including personal loans, credit cards, and especially payday loans. The Equifax program, for example, offers annual percentage rates (APRs) of 5.90% to 19.90%, while the VSELP charges 24.99%.

Types of Employee Loans

In general, there are two types of employee loans: those that come straight from your employer and ones that are offered through a partnership with a bank or other financial institution as an employee benefit.

If you get a loan straight from your employer, it could be in the form of the employer paying upfront for something you need. For instance, your company might cover costs related to buying a home or a car, after which you'd pay the money back to your employer.

Otherwise, your employer may refer you to its partner bank, which will evaluate your application and, if you're approved, lend you a lump sum of money.

Examples of Employee Loans

There are a few different types of employee loans. For example, you might be offered one of the following:

Unsecured Personal Loans

Unsecured personal loans tend to be offered by employers through a partner lender (unless your employer is a financial institution, in which case it might administer the loans itself). 

Your employer sets the minimum and maximum amounts, repayment terms, interest rates (if any), and eligibility requirements. For instance, you might be required to work for your employer for a set number of months before becoming eligible.

Transportation Loans

Some employers cover the cost of transportation to and from work as an employee perk. Others will front you the money to pay for transportation-related costs, such as a bus or subway pass, but the cost of this loan may be repaid via deductions from your paycheck.

Vehicle or Auto Loans

If you frequently need a car for work, your employer might help you pay for the cost of one. This can come in many different forms, depending on your employer. For example, your company might contribute to the down payment, helping lower your monthly payments. It might also pay a portion of your monthly payments based on how much you use the car for work. 

Advantages and Disadvantages of Employee Loans

Like any loans, employee loans have their pros and cons:

Pros

• Low or possibly no interest: Employee loans are usually offered as a benefit and an alternative to expensive payday loans and other personal loans. So interest rates tend to be lower, and in some cases, you might pay no interest at all.
• Could boost your credit score: Employee loans are often reported to at least one of the three major credit bureaus. So making regular, on-time payments can increase your credit score. (Of course, if you fail to repay, that could be detrimental to your score.)
• Available in small amounts: If you only need to borrow a couple hundred dollars, you can get that from an employee loan rather than turning to costly payday loans. Regular personal loans often have minimums of $1,000 or more.

Cons

• Sometimes strict eligibility requirements: Many employers have eligibility requirements you'll need to meet to qualify. For instance, you might be required to have worked for the company for a certain number of months or have a certain level of income.
• Can come with fees and other costs: In addition to interest, you may be subject to application fees, late fees, or other costs.
• Lower paychecks: Many employee loan programs are repaid by deducting the cost of the loan from your paycheck. This keeps you on track for on-time loan payments but will leave you with less money for other possible needs, such as home payments or utility bills.

How to Ask Your Employer for an Employee Loan

First, figure out how much money you need. Then ask the human resources department or your direct manager if your company offers an employee loan program. If it does, inquire about the eligibility requirements and the application process.

Alternatives to Employee Loans

If your job doesn't offer employee loans and you need to borrow, you have other options.

Unsecured Personal Loans From Another Lender

Rather than going through your employer, you can apply for a personal loan with a bank, credit union, or online lender. These tend to have more stringent eligibility requirements, such as good to excellent credit, to get the lowest interest rates.

On the plus side, there isn't a tie to your employer, so if you plan on leaving your job or don't want to have that obligation, an unsecured personal loan might be a good option for you.

Credit Cards or Credit Card Cash Advances

If you think you won't be eligible for a regular unsecured personal loan or only need a relatively small amount of money, you may want to use a credit card to cover those costs. Already having a credit card gives you the advantage of paying for those needs right now and not waiting for loan approval or being dependent on your credit history for consideration.

If you need cash, you might also consider a credit card cash advance. These come with different terms from your credit card purchases, including a different (often much higher) APR and additional fees. But you can usually get the money right away.

Home Equity Loans or Lines of Credit

If you own a home and have enough equity in it, you may be eligible for a home equity loan or home equity line of credit (HELOC). Both tend to have attractive interest rates, but keep in mind that you'll be putting your home up as collateral and could lose it if you're unable to repay.

Retirement Loans

Borrowing from your future self isn't always advisable, but sometimes it's your best option. So you may want to explore a 401(k) loan or one from another retirement account. These usually don't involve a credit check and repayment terms might be longer compared to what you'd get with other types of loans.

The Bottom Line

Employee loans, where offered, can be a convenient and inexpensive way to borrow money when you need it. If your company doesn't already have an employee loan program, consider asking if it could create one.