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Another pitfall for US workers

By Steve Bucci · Bankrate.com
Monday, January 6, 2014
Posted: 6 am ET

Employees with financial problems tend to be less productive than others. So it's not surprising that employers try to provide a little extra financial stability through employee credit unions, 401(k) plans and bonuses.

But what about short-term, high-fee loans?

That's just what some companies are trying. They're offering "workplace" loans of $150 to $500 with fees ranging from $8 to $25 plus interest, according to a report in The Wall Street Journal. The loans usually last about two weeks, and employees repay what's owed directly from their paychecks. These employer-sponsored loans are being advertised as a cheaper alternative to the traditional payday loan, even though they can carry an effective annual interest rate of 165 percent.

I suppose I should applaud a new alternative for cash-strapped workers, given the concern over typical payday lenders and the strong consumer demand for short-term loans. But I’m not.

Here’s why: Workplace loans serve the same purpose as payday loans, and they can create the same problems. Consumers generally turn to them because they need to bridge a gap in their finances. Usually, they're living paycheck to paycheck and need money for an unexpected expense. But with such a tight budget, it's unlikely that they'll have enough from their next paycheck to repay the loan. So, how does it get repaid? In many cases, with another loan. This can start a vicious, expensive cycle that is difficult to break.

Rather than rely on workplace loans or payday loans or any other form of emergency financing, consumers should learn how to plan ahead. They should be encouraged to build their own rainy day fund by socking away a few dollars each pay period. Sure, they'll make sacrifices to keep building their savings. But it'll be worth the peace of mind that comes from knowing they can pay for their next car repair or medical issue. No borrowing necessary.

Instead of short-term loans, employers could offer automatic withdrawals from paychecks into savings accounts. They could encourage saving by matching a percentage of what their workers deposit. Now that would make a positive difference in their employee’s lives.

What do you think?

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22 Comments
Jeff
January 07, 2014 at 6:16 pm

I have no doubt someone is making out like a bandit on this. Generally speaking, those with money like to exploit those without, those less fortunate,and those that are easily ripped-off.

Bailjumper
January 07, 2014 at 4:54 pm

Just another way for employers to exploit their employees. First they underpay them, then overwork them, nowloan them money against their paycheck. Pretty soon we will be paying the employer to have a job. This is a practice that should be outlawed. It kind of reminds me of the old blackmail scam "pay through the nose, or bleed through it".

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