Debt Consolidation: Loan from the employer?

An employer’s loan is not just an option if the banks reject the loan application. He is also suitable for those who want to secure more favorable conditions for their credit. Employers have a certain amount of leeway when it comes to granting loans, which must be exploited.

However, care should be taken so that the benefits do not turn into tax disadvantages.

All facts about the guidebook “Credit from employers” at a glance:

  • The former paycheck can be made as a loan or interest subsidy.
  • There are advantages and disadvantages in the emotional, rational and fiscal area.
  • An employer loan must also list certain points in its loan agreement:
    • Designation of the parties
    • Amount of loan amount
    • interest rate
    • running time
    • Regulations at termination

1. What is an employer loan and what do they offer you to pay your debts

1. What is an employer loan and what do they offer you to pay your debts

As the word aptly describes, employer credits are granted by the employer. These are payments that are paid outside the contractual agreements. Advance travel expenses are therefore not included.

Ever since the beginning of human history, it has been customary to ask his employer, today an employer, for help in times of need. In the past, unexpected illnesses, famines or city fires put people in the uncomfortable situation of having to borrow money. Lending to unknown third parties has always been associated with huge interest rates. Since the introduction of insurance, such uses have become rarer, at least in Germany. This is mostly about the purchase of cars, condominiums or luxury goods.

The modern form of the employer loan can be either a loan payment from the employer to the employee, which is reimbursed monthly or the employee pays interest subsidies to the bank. The interest subsidy is to be taxed in full as wages. However, the employer loan offers tax benefits. But not every employer is able to provide a loan to its employees. Smaller companies often fight for every cent themselves. For them it is impossible to grant a loan or to make interest subsidies. Larger companies may sooner allow themselves such concessions to the employee.

Civil servants have greater opportunities. There are even portals where employees can find out for themselves whether they are eligible for an employer loan or not. Not only civil servants, but also public employees benefit from this rule. If the employee is employed by a bank or insurance company, the chances of an employer loan are also good. The debtors and creditors sit, so to speak, directly at the source and can benefit from mutual knowledge.

Employer loans are characterized by the fact that they are approved by the employer. This can take the form of a loan payment or interest subsidy on bank loans. Tax aspects have to be considered.

2. What are the advantages and disadvantages?

Such an employer loan can bring advantages and disadvantages for both sides. In addition, one person may be at a disadvantage over another. In the run-up to this some thoughts should be made.

The emotional factor

On the emotional level, there are several things that can influence the decision to choose or have a loan. On the one hand there is the dependence of the employee on the employer. While the employer here believes that he can secure the loyalty of his employee, this coercive bond can unsettle the employee. The worker no longer has the opportunity to cancel the sails if he receives a better offer. He must then expect the corresponding consequences.

Especially in this day and age, where everyone is encouraged to be flexible and already have various job changes in every life planning, such ties can lead to anxiety. In contrast to the generation of grandparents, today’s employees are no longer so focused on their employer.

For example, close ties with the company are beneficial to the employer, but may be detrimental to the employee. On the other hand, in the case of operational redundancies, the employer will probably consider whether to terminate the debtor or the colleague. With a termination increases the risk that the loan can not be paid for lack of income.

Another aspect is the emotional bond that is actually built up. The moment someone else is asked for a favor, it creates a relationship in a positive sense. We signal to the other person that we need and want his help. This leads to a positive mood even when it comes to money issues and is referred to as the “Benjamin-Franklin effect”.

Of course, the chief financial officer who grants the credit is not incited to spend his free time with the debtor. But especially in large companies, it can be very valuable if the name seems familiar to him. And applying for an employer loan may even be evidence of some wisdom.

The tax factor

 If one deals with the topic of taxes, one will soon find out that under certain circumstances one travels better with an employer loan than with a bank loan. Employers may grant their employees cheaper interest rates than the banks. However, the discounted interest may only be 4 percent below the effective interest rates published by the Deutsche Bundesbank. These are to be consulted before conclusion of the contract and enclosed with the tax office in the course of the income tax declaration.

By the way, 4 percent does not mean 4 percentage points, but the actual 4 percent of the effective interest rate. Assuming in one example that the published effective interest rate is 5.2%, the employer must not fall below 4.99 percent. However, depending on the size of the loan, this rule is irrelevant since each borrower in this case is entitled to an allowance of € 44 per month. This means that the employer can grant the employee a monthly interest rate advantage of up to 44 euros, without the risk of tax consequences.

On the other hand, interest subsidies are counted as salary payments and must therefore be listed in full as gross wages in the income tax return. According to the tax code then the taxation takes place.

The rational factor

For the employer, the awarding of the contract is less risky in that he has the option of withholding part of his wages if the debtor defaults on the loan repayments. In addition, he has insight into the wage level and planned salary increases and can thus better estimate whether a loan can be paid off or not.

Precisely because of the cooperation, the employer can assess whether the employee belongs to the more reliable persons or rather has to be regarded as a bon vivant. Unreliable employees who are constantly late, failing to complete their assignments, or failing to do their jobs adequately, will fall on deaf ears with regard to employer loans to their employers.

For both parties there is a big risk factor: What happens at termination? Basically it is to be distinguished whether it is a culpable termination. This means that the employee was terminated due to his or her misconduct. In this case, the creditor may demand the immediate repayment of the loan. If it is a lawful termination due to illness, job change or redundancy, the provisions made in the loan agreement must be observed.

Factors that can influence the decision for or against an employer loan

Factors that can speak for or against an employer loan

3. These five points must be considered in the contract

 In the meantime, the Federal Ministry of Finance has defined when it concerns a wage advance in the sense of an employer loan : whenever it concerns unscheduled payments.

First of all, all parties must be mentioned in a credit agreement. These are the employer and the employee.

It follows the amount of the loan amount to which the contract amounts. This does not mean the entire redemption number, but the payout sum.

Now the interest rate at which the loan is bought by the employer must be determined. Again, the employer does not have to charge interest. However, if the monthly interest savings are above 44 euros or the interest rate is below 4 percent of the effective market interest rate, all amounts exceeding this amount are considered as a salary increase and must be taxed.

The term should be set, even if changes are kept open. So you have at least a clue in future negotiations. Especially in the credit business you always have to expect complications.

Finally, there is a critical point: even if the confidence in concluding a contract in the other is so great that money is lent: Tomorrow may look quite different. It is absolutely necessary that the loan agreement contains provisions which have to be made in the event of termination. Especially when the maturities are longer, this step is inevitable. As usual, it is at the end of the contract to set the market rate. It is understandable that the employer will no longer grant cheaper loans on termination. However, this clause allows the borrower to protect himself from overpriced interest payments and avoid an immediate repayment request.

List of the 5 points that a loan agreement must contain.

These criteria should be included in a loan agreement.

4. The conclusion: An employer loan is not for everyone!

 If you take out an employer loan, you have to be aware that you are entering even greater dependency. The employer may as well put the employee through its paces as a bank. Especially if loans were rejected due to negative private credit entries, this disclosure may be unpleasant to the employer.

However, it should be remembered that the employer employs his employees because of his job performance and not because of his past. The employer hopes for loyalty, the employee a favorable credit. In this case, tax factors must be taken into account. The conclusion of the credit agreement should leave room for adjustments and changes.