Need to know:
- A workplace loan scheme enables employees to access a loan through their employer’s benefits package, which they then repay through salary deductions from net pay.
- Workplace loans can be a useful tool to help employees develop savings habits, as once the loan is repaid, the salary deduction model can continue to be used to contribute towards a savings product instead, such as a corporate individual savings account (Isa).
- It is essential that financial education is delivered in conjunction with workplace loans. This helps employees to address and understand the root causes of why they needed financial assistance.
Employees' financial issues are becoming a prominent issue for employers: research published by Jelf Employee Benefits in August 2017 found that 71% of employer respondents believe that employees may be distracted by personal debt problems while at work. The research also found that 43% of respondents believe employees had been absent from work in the preceding 12 months in order to deal with financial problems.
With this in mind, the number of employers offering workplace loans as an employee benefit has increased over the last two years, says Joanne Whittaker, director at workplace loan provider Workplace Finance. “[Employers] are opening themselves up to the support people need and the debt problems that people do have and this is one way of supporting them,” she says.
So, how can a workplace loan scheme be utilised as part of a wider financial wellbeing strategy?
What is a workplace loan?Employers that offer a workplace loan scheme enable their employees to apply for a loan through the organisation and its chosen provider, rather than by having to approach a traditional high-street lender. Repayments on the loan are then made using salary deductions from the employee’s net pay.
Typically, workplace loans are used to facilitate debt consolidation: 60% of workplace loan provider SalaryFinance’s employee customers cite this as their reason for taking out the loan. The remainder of employees use the loan scheme to afford ordinary expenses such as home repairs, rental deposits or car repairs, says Patrick Fitzgerald, commercial director at SalaryFinance.
What are the advantages of workplace loans?Workplace loans can also help to support employees who want access to a loan, but may not be able to get one from a typical lender, says Whittaker. For example, some workplace loans take into account an employee’s length of service to mitigate a potentially low credit rating, which could affect whether employees are accepted for a loan. “We may still be able to offer them a loan," she explains. "As long as the affordability is ok, we can see that they have been working for their employer so the risk is lower.”
Taking out a loan through a workplace scheme can also enable employees to better manage their finances based on their individual circumstances. For example, an organisation’s payroll department can keep its workplace loan provider up to date on situations that may impact whether an employee can continue having payments deducted from salary. This could include when an employee is on sick leave or maternity leave, or if they are about to leave the organisation. Whittaker says: “We can look immediately at putting payment plans in place if necessary; we can freeze payments, we can freeze interest and charges. But [the] average lender would have no idea.”
The fact that workplace loan repayments are made via salary deduction on a fixed date can also help to provide peace of mind to employees and help them to plan ahead, says Heidi Allan, head of employee wellbeing at Neyber. “[Workplace loans] make things cleaner, easier and more straightforward for employees and help them get a better handle on what’s needed and the prioritisation of their money,” she explains.
This could be particularly useful for employees who struggle with day-to-day budgeting.
Using workplace loans to consolidate debts can help to reduce employees' financial stress by cutting down the number of payees they have too. “If [an employee clogs their] mind up when [they] look at [their] bank account with lots of small amounts, it can actually be quite overwhelming and daunting,” adds Allan.
Workplace loans can also encourage employees to start good savings habits, because the amount that is deducted from salary for loan repayments can be re-diverted into a savings vehicle, such as a sharesave scheme or corporate individual savings account (Isa) once the debt has been paid off. Darren Laverty, partner at Secondsight, says: “If people are quite used to paying the debt, the same money, once it gets cleared, can go into savings and get them into a good place.”
The importance of financial educationTo maximise their value as a benefit, workplace loans should be viewed in the context of a holistic financial wellbeing strategy, says Charles Cotton, senior performance and reward adviser at the Chartered Institute of Personnel and Development (CIPD). “[Employers] have to think about employee financial wellbeing holistically, and think of the different elements on their own, but how they fit together,” he explains.
Financial education, therefore, should form the foundation for a workplace loan product. “Loans are fine to get over an initial problem or to resolve a specific situation," says Allen. @But [employers] need to tackle why people got themselves in that situation in the first place. […] Without education, all [employers are] doing is putting a plaster over the cut. [They are] not actually going to help that cut to heal and [they are] not going to help that cut [not to] re-open again in the future, so education is so important, but it has to be done in a supportive and inclusive way.”
Financial education also helps to ensure that only employees who are in financial difficulties take up workplace loans, adds Laverty. There is a danger that with employer endorsement, some employees may be tempted to use a workplace loan as a savings shortcut, to purchase items immediately with the aid of a loan rather than saving for them. “[Employers have] got to be careful how [they] communicate [workplace loans] because [they] don’t want it to be seen as the normal thing to do in everyday life," he says. "[They’ve] got to be careful they’re not making it too promotional.”
Workplace loans as part of the financial wellbeing puzzleTo help employees improve their financial circumstances, there are three elements employers should implement as part of a financial wellbeing strategy in order to help employees improve, saysFitzgerald. “First of which is to provide affordable credit,” he says. “Second is to provide easily accessible savings, and the third is to wrap all of that up with financial education and tools.”
As well as financial education, workplace loans can also be offered in conjunction with a savings vehicle to encourage employees to move away from the likelihood of future debt. Fitzgerald adds: “It is important to try and make sure that that evolutionary journey is offered to employees; not as a replacement for long-term savings, but rather to ensure that everybody in the workplace has that buffer which insulates them from the need for debt again in the future.”
This could include a workplace Isa, sharesave scheme, or a another type of savings product.
Employers should also create a workplace culture that facilitates conversations around financial challenges, says Cotton. “It’s better to have an environment at the workplace that recognises [that employees deviate into financial difficulty] so people feel more comfortable talking about their financial situation rather than letting it build up and get on top of them, and then leading to a crisis later on, which can affect their performance,” he says.
Workplace loans, therefore, will achieve the best results if offered in conjunction with financial education and a savings vehicle as part of a inclusive and supportive organisational culture. As Fitzgerald says: “[A workplace loan has] much more power when it’s folded into broader initiatives, [...] so the more this can be an aspect of a broader wellbeing strategy […], the more momentum will be behind it within the organisation. The more momentum [that is] behind it, the [greater] impact it’s going to have among the employee base and the greater the results for the organisation.”
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