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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
Tom Neal
January 07, 2014 at 12:48 pm

Union workers beware, Boeing, Boeing, Gone goes my pension. Big Companies do it better. IAM 751

j gray
January 07, 2014 at 11:45 am

Robinhood! Robinhood! where for are thou? The sheriffs of New World Order is running a ponsi,amongst its Lams. Please gather your merry accountants and save us.

Angel
January 07, 2014 at 11:43 am

Stop believing that a person who lives paycheck to paycheck is living above their means. You have no idea of what goes on in a person's live so generalizations is just being ignorant. Saying that they sow what they reap borders on cruelty. For that person living paycheck to paycheck, a busted water heater, a child becoming sick or any other unexpected expences cannot be what they reap. Stop being so self-righteous. Hurray for those of you who do not go through economic hardship, but stop condemning those who do as you do not know their stories and I don't think you even care. Receiving a fair wage and linked savings accounts sounds really good to me and what a blessing it would be for so many people to at least survive the economic hardship they have been experiencing. However, we do know that it is not going to happen.

tramky
January 07, 2014 at 11:12 am

So-called employers that offer this kind of short-term loan arrangement are VERY dubious. And frankly, who would want employees who use such loans? What does it say about the employee?

This is for bottom-feeders on both the employer and employee side.

Union Woker, Retired
January 07, 2014 at 10:57 am

I am a union worker and agree with the Union Worker and have been retired with a great retirement funded while working. I have showed many young people how great the Union can be for you but they do not want to put out the effort for a good paying job with many benefits.
The loans remind me of the Company Store that owned the worker. Are we going back to the old?

not surprised
January 07, 2014 at 10:53 am

That's what we call in New Jersey a "shylock".

Kathy Shindler
January 07, 2014 at 10:47 am

In life there are choices to be made. I don't earn a big paycheck, do I spend my money on frivolous nothings or do I pay my bills? If you make the right choice, pay what you can each pay week to those bills, set up monthly payments for utilities, give up unneeded cell phones & other electronics (i.e. xboxes, ipads, etc.) you can't afford & have only basic cable & internet for your entertainment purposes & leave those extra packages (i.e. sports, movies, etc.) for those that can afford them & rent dollar movies from redbox. My parents lived pay check to pay check & both worked, but their bills were paid, they owed no one above & beyond basic living expenses & when an emergency came along they talked to the doctor or grocer or whoever to set up monthly payments till they paid that unexpected bill & paid it even if that left them broke till their next paycheck. Our entertainment was playing with what toys we had, family games, outdoor fun with the neighborhood kids, reading, using our minds instead of our fingers. My children live the same way & fortunately for them they were blessed with good paying jobs (none college educated either) & they use their money wisely to make sure their bills are paid. You don't want to earn minimum wage? Get yourself trained to do something better, you don't have to go to college or depend on unions or God forbid the government to better your paycheck, it's up to to you & what choices you make for your life. Read your bible, yes all you Liberals, I am a Christian, and the good book tells you how to handle your finances very clearly.
My husband lost jobs through layoff or being fired but we didn't depend on or expect anyone else to bail us out, he went to work at two part time jobs until he landed a better paying job & I went to work also. We chose to work day/night shifts so no one else was raising our children & didn't have child care expenses. For single parents it's a little different but turn to your churches who offer daycare services, they'll work with the parent, I know my church does. So the choice is up to the individual, not their company or the government, to find ways to make ends meet until they train for & find a better job. I continue to pray for those who are experiencing difficult times because of what the government is doing to this country, but my grandparents/parents got through the depression through hard work, determination, and applying common sense to how they spent their hard earned dollars. It's no different for those struggling today.

Oh, pick me, I know!
January 07, 2014 at 10:04 am

Here's another idea:

Employers could pay their employees a living wage so that they are able to save a few dollars each week. Hint: Minimum wage is *not* a living wage.

After that: Linked savings accounts, matching contributions, etc. are all fine ideas...

Tammy
January 07, 2014 at 9:52 am

These type of stories and the comments that follow always fascinate me. While I agree that this practice is rather questionable, I also believe that anyone taking a loan from their employer reaps what they sew. If you can't pay it back... don't borrow it. Basic logic. Isn't this mentality what got us here in the first place?!?!?! Banks offering loans to folks they KNEW wouldn't be able to pay them back. They foreclosed on THOUSANDS and THOUSANDS of homes when the market turned and interest only loans jumped to three times the monthly payment. It's sad because I know when your desperate, it's harder to be logical. I just think people need to smartin up and be responsible for their choices.

union worker
January 07, 2014 at 9:40 am

How about convincing people to join a union? We have a matched savings account, as well as a matched 401k, as well as a pension. On top of that I make at least $15,000 a year more than people in my area who have similar non union jobs. I don't make a ton of money but I can pay my bills and save a little for unexpected expenses.

I have spent a number of years working jobs that weren't union and with most of them I too struggled. What makes me shake my head in disbelief is that the majority of the companies I worked for in the past were much, much larger than the one I work for now.

Yes I did have to pay to join the union and yes I do have to pay monthly dues. The one time signup fee was around $100. The monthly dues are about $45. I feel as though I hand the union $540 a year and they give me back $14,460. I'll take that return any day.

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