Employer loans are also called employee loans or personal loans. Both employer loans and installment loans to employees are referred to as employee loans. A distinction to be made from an employer loan is to make early wages or salary payments, colloquially known as “advance payments”.
In the case of an employer loan, the employer grants loans as part of the company social benefits. The parties involved individually determine the amount of the loan and the term. The loans can be short-term to compensate for financial emergencies or long-term for larger financing goals. Sometimes only a few hundred dollars are needed to save the employee from a financial shortage. But consumer loans in higher sums are also possible. Companies can also set up special home finance programs, which result in a high loan and a long term. Long-term planning is particularly advisable for larger loan amounts, because smaller companies cannot spontaneously raise or release large amounts.
Benefits for workers
As a rule, interest rates are relatively cheap compared to bank loans and the employee is more independent of banking.
The employer can use this loan specifically for employee retention. For him, the credit risk is also lower than it would be for banks. Because he has direct access to the wages accruing for the debtor’s benefit and relative security through the employment relationship.
Who can access employer loans?
Employer loans exist in all economic sectors. However, they are subject to special legal provisions in banking. For example, loans to bank employees in managerial positions may only be granted by decision of all managing directors and on market terms. In other companies, works councils are subject to co-determination if several employer loans should be granted, because that falls into the company’s wages.
Is there a right to an employer loan?
Providing employer loans is a voluntary decision by the employer, and there is no obligation to do so. However, if an employee is granted one, others in the company are also entitled to it. Because the principle of equal treatment applies. However, workers who are already deeply indebted or who have given notice of termination can be denied the loan. As a rule, trainees, employees during the probationary period and employees with fixed-term contracts are also excluded from the employer loan.
Who do I ask for an employer loan?
In smaller companies, the boss is responsible for the request for the employer loan. The personnel position or the works council are the right contacts in larger companies to get information first. A company agreement may already regulate the granting of an employer loan.
Contractually fix the agreement
In order for the loan relationship to be legally secure, it must be contractually fixed. The agreements that must be recorded in writing include the determination of:
- Loan amount
- Redemption modalities
- running time
- Collateral Loan
- Procedure for termination of employment
Calculate the interest rate and the monetary benefit
Compared to banks, employers usually offer lower interest rates on loans. The monetary benefit resulting from this interest rate difference must be taxed. To determine the advantage, the market interest rate (standard interest rate) serves as an orientation.
The easiest way to calculate the standard interest rate is to deduct four percent from the effective interest rates for the type of loan that the Best Lenders Bank recently published. If the interest rate on the employer loan is less than 96 percent of these effective interest rates, the interest benefit must be taxed as a non-cash benefit. If the employer waives interest, the entire loan is subject to income tax liability.
The repayment modalities are determined individually. For example, for repayment, it can be agreed that the employer retains part of the employee’s remuneration each month – until the loan is repaid in full. The usual legal garnishment limits must be observed.
The employee is obliged to repay the loan in full. If this is not the case or if the entrepreneur waives the repayment, the sum is considered wages. This is fully taxable as part of the income tax.
What happens when the employment relationship ends?
A strict distinction must be made between the employment relationship and the obligation relationship. An end of the employment relationship does not mean at the same time the automatic termination of the loan contract and an early recovery. This is at least true if the agreements are contractually correctly regulated in the event of termination. Then the loan contract continues, there may be an opportunity to raise the interest rate to the market level. If there is no need agreement, the employer may be able to request total repayment within three months.