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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
Bob
January 07, 2014 at 9:33 am

Which is better? 165% work place loan or a 467% payday loan.

Dan
January 07, 2014 at 9:09 am

Maybe if the people who buy low and sell high in the gas market would stop their raising of the gas prices and our People The voters put in office in DC would do what they should do ,a Government by the people for the people & by the people this country would have no problems...

Steve
January 07, 2014 at 8:47 am

When is the last time you had less money being earned that what it cost for gasoline, groceries and some living expenses?

Andy
January 07, 2014 at 8:44 am

I think that would be a complete waste. In addition to the extra money a company would pay out for the matching they would have the administrative costs of managing such a program. Also, unless you create a bunch of complicated rules as to how long you have to leave the money in the account with a bunch of exceptions for emergencies, the people that this is primarily aimed at will simply take the extra money and spend it as soon they get it. At a time when companies are cutting back on the benefits employees already have, it would be better to try to keep what you have instead of trying to find new ways to spend limited resources.

Larry
January 07, 2014 at 8:32 am

Well the trucking company does the loan but no penalty far as interest rates go. Most trucking companies offer a loan before pay days on the miles you going to put in on the road, so that you can have some money just in case of an emergency. So I wish most companies could do that without looking at it as a payday loan. Letting you barrow money based on your hours or how ever you get paid without payday loan plus interest.

gary brown
January 07, 2014 at 8:31 am

This is what the plantation owners did back in the slavery days to keep there slaves working with debt they could never pay back. Have we come to that?

Frank Schmidt
January 07, 2014 at 8:21 am

I believe this is called forced retirement ?

Dave Evans
January 07, 2014 at 7:35 am

"Back in the day" this was called loan sharking; in the military it was called a slush fund. And yes, sooner or later the borrower owes their entire paycheck plus some. Of all things government intervention could be useful, this is one.

What companies are doing this? Their names should be made public, along with the names of the people who instituted the policy and those who enforce the collections.

cnk
January 07, 2014 at 7:32 am

you won't find any public sector union workers in this bunch!

David Fossum
January 07, 2014 at 2:30 am

You load 16 tons and what do you get? Another day older and deeper in debt. St. Peter don't call me cuz I can't go; I owe my soul to the company store...

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