The pros and cons of getting a loan from your employer
Debt isn’t something anybody really wants to be in.
However, life is expensive and unexpected circumstances might arise that require you to take out a personal loan.
While you might not want to sign that acknowledgement of debt form and officially owe money, sometimes it is necessary.
It is not the ideal situation to find yourself in, however, many people end up having to borrow money.
Many people immediately think of loan providers or banks when they think of taking out a loan. However, you do have options. And one of those options might be taking out a loan from your employer. Some companies understand that their employees might be in need of extra finances due to some circumstances beyond their control. And that is why they do not mind printing out an acknowledgement of debt template and lending an employee the personal loan they need.
Pro: you might get a favourable interest rate. Your employer is likely offering you a personal loan because they want what is best for you and your finances. That is why they might offer you an interest rate that is more favourable than that of the banks. Financial service providers want to make money as that is their entire business. This is why they give you interest rates that ensure that they make more money off of you than you borrow. They base this on your risk profile and if you have you have a high-risk profile, they will likely increase your interest rate in order to cover their losses should you default on the loan.
Your employer, on the other hand, is likely not wanting to make a profit off of your loan. This is why they might choose to offer you a favourable interest rate that only covers inflation or the interest they would have made if that money was in the bank.
Con: you will have to let your employer know that you need money. This can be an embarrassing thing to admit to the people who sign your monthly paycheque. Signing an acknowledgement of debt is not pleasant when it comes to borrowing money from your employers. And if you work for a small company, you might find that your colleagues will eventually find out about your loan, even though your employers tried to keep it as quiet as possible. This can make you feel uncomfortable, especially as you likely do not want to enter into conversations with your coworkers about your financial situation.
Pro: your employer can take that money out of your paycheque each month. This means that you do not have to worry about paying into your loan or see it coming off of your bank account. There is no way for you to default on your loan because it is being paid off before you even receive your money on payday. This also takes that debt off of your mind and you do not have to think about it, which can help to stop you from stressing even more about your finances.
Con: your employer will likely ask for a specific reason. The situation that is causing you to take out a loan might be extremely personal. This means that you probably do not want many people to know about it. And telling your employer that you are having financial issues and exactly why is not a comfortable conversation to have. Unless you have a very specific relationship with your employer, they will want a reason for the loan in order to know that your reason is worthy of them lending you money.
Pro: you know your employer. Knowing the person who you are taking out a personal loan with can make the whole experience less daunting. Taking out a personal loan from a bank can feel, at best, impersonal as it is a business transaction. If you have a good relationship with your employer, you could feel more comfortable explaining your need for a loan to someone you know well. Although you don’t have to tell the bank or a loan provider, it might feel better to be able to talk to someone.
Con: you will likely have to stay with the company for the duration of the loan. If you are happy with your job and your career growth at the company, this might not be an issue for you. However, if you have been thinking of leaving, taking out a personal loan with your company might not be ideal. You might find that they insist that you stay with the company until the loan has been paid off. This is most likely in these cases.
Only you can decide whether taking out a personal loan from your employer is right for you. Keep the above pros and cons in mind when making your decision.