Borrow money from the boss to complete real estate financing? In some companies unthinkable, in others, the employer loan is basically offered to employees. Is the employer loan a sensible building block in real estate financing or should employees prefer to refrain from it?
What is an employer loan?
The employer loan is also called an employee loan. It is a loan granted to employees by their boss or management. In fact, it is a personal loan – it does not necessarily have to finance a property or a house purchase. Nevertheless, employer loans are usually earmarked – if the loan is granted for further training, for example, the borrowed capital must actually be used for this.
Why do companies give employer loans at all? The answer is simple: to retain employees more firmly. At the same time, there is a great temptation for employees to get an employer loan since the interest rate of such loans is generally significantly cheaper than that of banks.
The interest rate for an employee loan is based on the so-called standard interest rate. When concluding the contract, the current effective interest rate published by the Good Finance is used, after which the lending company can apply a discount of up to 4%. Incidentally, the loan amount is not limited, which means that a loan of a few hundred dollars, for example for a seminar, to several hundred thousand dollars, for example for real estate financing, can be granted.
Attention: the company with which you are employed is in no way obliged to grant you a loan, even if the employee loan is offered in principle. If there are garnishment of wages or indebtedness, the boss often refuses the personal loan – on the other hand, employees who only work part-time instead of full-time in the company must not be offered worse credit conditions.
Advantages and disadvantages of employer loans
An employer loan is not necessarily the cheapest option for financing – since the company carries out the interest discount mentioned above on its own initiative – or not. A qualified credit comparison is essential before you sign a contract. The criteria for the comparison are the type of loan, the term and the duration of the fixed interest period.
A decisive advantage of the employer loan is that often no special security is required, especially with smaller loan amounts. A bank, on the other hand, generally requires collateral and creditworthiness even for small installment loans.
Attention: although an employer loan is usually cheaper than a comparable bank loan, the interest rate advantage must be taxed as a monetary benefit! The interesting advantage is treated as a non-cash benefit and is therefore subject to income tax. These deductions or costs must be factored into a credit comparison. There is, however, an exemption limit of USD 2,600 (each at the end of the wage payment period, tax-free is also an interesting advantage of a maximum of USD 44 per month.
End of employment – end of the loan?
Leaving the company, either by termination or by termination by the employer does not necessarily mean that the loan agreement between employer and employee also ends. It is strongly recommended that the modalities for this are specified in the loan agreement so that there is legal certainty for both parties. There are several options here:
1. The contract continues to run as usual, and at the favorable, predetermined conditions – a desirable scenario for the employee, for which there is actually no reason for the employer to grant it.
2. The contract continues, but the conditions deteriorate. The interest rate is usually adjusted to the current standard interest rate – by the way, an excessive increase in interest is not permitted.
3. The contract ends with the termination of the employment relationship and the former employee is obliged to repay the entire loan amount ad hoc to the boss. In the worst case, this means rescheduling, which means additional costs for the borrower of around one percent of the loan amount if the former employer is registered in the land register.
When the employee can no longer pay
If installments are no longer paid on time or are stopped altogether, the same thing happens with an employer loan as with traditional bank financing: a bailiff will sooner or later be at the door and, for example, pledge part of the salary. If the employer loan has been used for real estate financing and the employer is in the land register, in the worst case a forced auction can be scheduled.
It is recommended that the credit installment is retained directly from the earned wages and only the difference is transferred to the employee’s account – this means security for the employer and ultimately also for the employee.
Conclusion: Yes, an employer loan can be cheaper than a loan from your house bank – however, a comparison is necessary before signing the contract. Think of the taxation of the interest advantage granted, and to what extent there is a financial advantage after deducting these costs must be decided individually. Bear in mind that you are dependent on your company due to debt and that it can sometimes be hard on the employment relationship if you can no longer pay credit installments on time or at all.