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The ability to get an advance on your salary or even a loan from the company you work for, is seen as a benefit for employees. It can certainly be a quicker, safer, and even cheaper way to get credit than with a loan from a credit provider. However, as with all debt decisions, make sure you consider the full picture before you apply for a loan from your employer.
Before we look at the pros and cons of workplace credit, let’s get clear on the difference between a salary advance and a workplace loan. A salary advance is exactly what it sounds like: it is a part of your salary that the company pays out to you before payday. The idea is that the advance will be deducted from your salary at the end of the month. In terms of the National Credit Act, the company must charge interest on the advance. A workplace loan is a loan you get from your employer that comes with a loan agreement that stipulates the interest rate and the repayment schedule. The loan instalments are deducted from your salary. Many companies prefer to give employees loans instead of salary advances, mainly because of the danger that a person could fall into a cycle of salary advances because the salary minus the advance amount is not enough to cover a household’s expenses.
The advantages of a workplace loan
The loan interest you pay is likely to the best you can get, given the rules that companies have to adhere to under the National Credit Act.
While your employer has to check that you can afford to repay the loan, the criteria might not be as strict as those that a credit provider will apply.
You will probably get the money you need quicker through a workplace loan than through a credit provider.
The loan application process is likely to be simpler, given that your employer already has most of your personal information.
Should you run into repayment problems, it might be easier to negotiate new terms with your company than with a credit provider that doesn’t know you.
Repayment is simple and easy, given that the instalment is deducted directly from your salary.
The disadvantages of a workplace loan
SARS sees workplace loans as an employee benefit, and it can therefore have an impact on the tax you pay at the end of the financial year.
You might not get the full amount you need due to company rules that govern the size of a loan an employee can get.
Your company might put limits on what you can use the loan for. For example, it is likely that you would not be allowed to use a company loan to start a business, as it would constitute a conflict of interest.
If the loan process goes wrong, it can damage the relationship you have with your employer.
Factors to consider
It can be tricky to bring your personal finances into your workplace. Therefore, decide how much you are willing to disclose to your colleagues before you submit your loan application.
Do your homework. Before you apply for a workplace loan, ask for your company’s policy on the matter so that you have all the information you need to make a decision. This includes the loan interest, repayment period and any other company-specific rules. For instance, what is the situation if you want to change jobs before the loan has been repaid in full?
Compare your company’s loan offer to loans available from other credit providers. You can use Bayport’s personal loan calculator to help you work out the full cost of the loan you are considering.
Work out your budget before you commit to a loan. You have to make sure that you can afford it.
Insist that your employer gives you a written loan agreement. It is very important that you and the company see the same picture and play by the same rules.
Make sure that you understand the loan agreement before you sign it. If necessary, ask a friend or family member to go through it with you, and ask the HR department to explain anything you are uncertain about.