How do employer-employee loans work?

When you’re in a pinch, you may be tempted to ask your employer for a loan. However, there will be certain conditions attached, and it’s important to know what these are.

We find out what an employer-employee loan is, and we have a look at the questions you should ask before initiating the process.  

Tip: If you want to opt instead for a personal loan instead

Understanding employer-employee loans

Employers can offer their employees the option of borrowing money from them. This is known as an employer-employee loan, and it’s used for salary advances or as an alternative to traditional loans.

Danie van Niekerk, executive head of financial services at Indwe Blue Star, says that it may be easier to access the money you need during an emergency from your company rather than from a loan provider.

“It’s likely that you will be charged low or zero interest on your loan, and this means that you will be able to borrow money at a much cheaper rate than you would through a bank,” says Van Niekerk.

The National Credit Act (NCA) oversees consumer credit agreements in South Africa.

When it comes to employer-employee loans, the NCA has jurisdiction under the following circumstances:

• The employer expects the employee to pay interest, or fees, on the loan
• The money received is deferred – in other words, it’s a loan and not a gift

If these conditions apply, then the employer has to register as a credit provider with the National Credit Regulator (NCR), and they have to abide by their processes, such as undergoing a credit assessment before extending loans to employees.

However, if an employer decides to offer loans to their employees without expecting any kind of compensation for it, such as interest-free loans, then they will fall outside of the NCA’s jurisdiction. 

Ask yourself these questions about the loan 

Before you take the plunge and accept a loan from your employer, you need to make sure you understand the consequences of doing so.

Specifically, you need to ask yourself:

1. Are you protected under the NCA? If your employer is not registered with the NCR and they don’t charge you any interest or fees, then you won’t be able to rely on the regulator for assistance if anything goes wrong.
2. Will it interfere with your performance review? If you’re a model employee, but you don’t adhere to the loan agreement that you have with your employer, this may be raised during your performance review and may count against you.
3. Can you afford the loan? If your employer doesn’t work with the NCR, then they probably haven’t run a recent credit check on you, or thoroughly assessed whether you can actually afford a loan. Be realistic and make sure you will be able to repay it.

Van Niekerk suggests comparing the terms of the loan you’re offered by your employer with the terms you manage to qualify for through a formal loan provider, such as a bank. 

Find out the interest rate you qualify for by applying for loans with JustMoney.