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Employee loans could be an alternative to borrowing money from a high street bank or online lender. Here, we give an overview of the types of loan that your employer may be able to offer, including loans for commuting and salary advances.
What are employee loans?
Employee loans are a type of personal 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 ticket upfront. This is where your employer may be able to help.
While not all employers will offer season ticket loans, they are nevertheless fairly common to see as part of a benefits package. You should check with your employer to find out whether it offers them.
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
Salary advance
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 also offer an Employer Salary Advance Scheme, which has become popular in recent years – especially in the context of the cost of living crisis.
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 allowing you to withdraw money and it won’t appear on your credit history.
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 can see if yours is included.
Sam Bromley, Lead Writer and Personal Finance Expert at NerdWallet
What our Nerds say…
“Salary advance schemes normally charge a small fee per withdrawal for their service. While these fees may be small, it’s important to consider them in the context of how much you’re withdrawing and keep in mind that small fees add up. For example, if you’re withdrawing £10, but are being charged £1.49, that fee is high considering the amount you’re taking out.”
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. Because salary advance isn’t a type of credit, 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’ll 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 may be worth comparing personal loan rates to find a more regular loan that suits you.
Other loans may be available in the UK loans market that are not included in this service.
Where to get debt help
If you’re looking for a loan from your employer to help make ends meet, and are struggling with debt, it’s important to note that there are charities available that can give free debt help, such as:
- Citizens Advice
- StepChange
- National Debtline
Charities like this can help with things like budgeting and coming up with a plan to deal with your debt. They could also help you apply for debt respite schemes such as the ‘Breathing Space’ scheme in England and Wales and the Debt Arrangement scheme in Scotland. There isn’t currently an equivalent scheme in Northern Ireland.
Image source: Getty Images
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