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If you need to borrow some money, then there may be plenty of options open to you. While a high street bank or online lender might be the first place you think of, there are alternatives.
One of these alternatives could even include your employer.
What are employee loans?
Employee loans are a type of loan you can get from your employer. Not all employers will allow you to borrow money, but some are able to offer certain types of loans to its employees.
Loans to employees can take different forms. For example, a company could offer a no-interest loan to help an employee pay for a season ticket so they can commute to work. Employers may also partner with a provider so employees can take out an advance on their salary.
Employers can offer loans to an employee worth up to £10,000 without paying any tax or National Insurance.
If you are an employer, it may be worth seeking professional advice if you are unsure about the tax implications of providing loans to employees.
Types of employee loans
Below are two of the most common types of loans that may be available from your employer.
Season ticket loan
As the name suggests, this is a way for your employer to help you pay for a public transport season ticket for your commute to work.
Buying an annual ticket could save you money compared to buying weekly or monthly tickets, for example, but you may not be able to pay the cost of the annual upfront. This is where your employer may be able to help.
Not all employers will offer season ticket loans, so you should check with your individual employer to see if they do.
The way you apply for a season ticket loan can vary between employers. You may need to get a quote of how much a ticket will cost and then fill in an application form with the relevant details. For this approach, your employer would approve your application and send you the money to buy the ticket. Alternatively, some employers may purchase the ticket on your behalf.
Some employers and providers may also allow you to request a season ticket online, which is then sent directly to your employer to approve.
To repay the loan, your employer will deduct payments from your salary each month. These loans are usually interest-free, so spreading the cost in this way doesn’t cost you more than the price of the ticket overall. You will typically need to have repaid the full amount of the ticket by the time it expires (usually within 12 months if you buy an annual ticket).
» MORE: How to save money on rail fares
Some employers partner with lenders in order to offer loan services to their staff. This may take the form of a personal loan at potentially competitive rates, which would usually involve a credit check. The repayments would be deducted from your paycheck each month (after the usual tax and National Insurance deductions).
However, some employers can also offer something called an Employer Salary Advance Scheme.
With this scheme, the employer doesn’t offer a loan directly, but they work with the provider to allow you to access some of your salary in advance. This amount will be deducted from your next paycheck.
You can typically borrow up to around 50% of your accrued salary in advance, although this will vary between providers and employers.
Advances on your salary are intended to cover short-term, one-off costs and they could be a useful alternative to taking out high-cost credit. However, you need to be sure that you will still be able to afford your regular expenses with your next pay packet once the advanced amount is deducted.
If you continually take out a salary advance to make up a shortfall in your income, you risk ending up in a cycle of borrowing where you continually use a salary advance to make ends meet.
Salary advance providers don’t need to run a credit check before offering a loan and it won’t appear on your credit history.
Bear in mind that salary advance schemes normally charge a small fee per withdrawal for their service.
To find out if your employer offers a salary advance scheme, you can ask them directly. Alternatively, providers may list the employers they work with, so you could see if yours is included.
Pros and cons of employee loans
There are some obvious benefits to taking out an employee loan, including:
- You can borrow relatively small amounts. You may be able to borrow a couple of hundred pounds if you get an unexpected bill, for example, which you may not be able to get from a bank or building society. Borrowing these smaller amounts may usually mean you have to turn to a payday lender or an overdraft, which can be expensive ways to borrow, compared to an employee loan.
- Low interest rates. The total cost of borrowing from your employer is likely to be small, if it costs anything at all. For example, a loan to buy a train season ticket shouldn’t come with any interest charges at all.
- No credit checks. Salary advance providers won’t typically run a credit check, which means your credit history won’t be affected. However, this means you are responsible for ensuring that you can afford to take out an advance.
But salary advances and borrowing from your employer can have their downsides.
- The amount you borrow can be quite limited. If you need to borrow a more significant amount – for example, to carry out some home renovations – then an employee loan is unlikely to be a suitable option.
- Salary advances come with a fee. This means that, even though you might not be charged interest, salary advances are not completely free.
- Some salary advance companies are unregulated. These providers don’t need to be regulated by the Financial Conduct Authority, which means that you won’t be able to complain to the Financial Ombudsman Service if something goes wrong.
- Risk of getting stuck in a cycle of borrowing if you use a salary advance. Less money will go into your account next time you are paid because the repayment for your salary advance will be deducted. If this means you struggle to pay your expenses that month, you may need to borrow again. You should seek debt help if you are finding it hard to cover your expenses.
Alternatives to employee loans
If you only need to borrow a relatively small amount, then there are plenty of options. You could make use of a 0% credit card which, as the name suggests, does not charge interest on your balance for a specific period. However, you will still need to pay at least the minimum payments each month and clear your card before the 0% rate expires.
Alternatively, you might be able to make use of a fee-free overdraft. This may mean you need to talk to your bank or move your current account, however.
Depending on your situation, you could ask family or friends for a loan. If they can afford to lend you money, this can be a cheap and useful option to take. However, make sure you agree on how and when you will repay the loan to minimise the chances of disputes later down the line.
It’s also worth looking to see if you qualify for a loan from a credit union, as they may be able to cater for smaller loans, at potentially lower rates than other lenders.
If you need to borrow a more significant sum, then it’s worth searching the market to see what rates you can get on a regular personal loan.
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Three in five UK adults have asked to borrow money from their friends or family, with more than a third needing it for a bill, a new survey has found. Find out more about this hidden world of borrowing and how it can go wrong.