What Are Payroll Deduction Loans?
Has an unexpected expense made you wonder, "what are payroll deduction loans?" Find out what options might be best for you.
Life can throw unexpected expenses your way, like vehicle breakdowns, medical emergencies, and major house repairs. Due to limited resources, it can feel impossible to recover from these financial losses. Sometimes, getting a loan feels like your best bet. One option you have as an employees is to explore payroll deduction loans.
What are payroll deduction loans? Here’s everything you need to know about them, including their pros, cons, and alternatives. We also compare them to payroll advances. Learn about all your financial options so you can make an informed decision that supports your life goals.
Pros & Cons Of Payroll Deduction Loans
Payroll deduction loans are short-term loans that help employees manage financial difficulties. Unlike standard loans, monthly repayments for a payroll deduction loan are taken from the borrower’s paycheck.
Another difference is that payroll deduction loan lenders use income, cash flow, and other payroll data instead of credit score as the basis for loan approval. Your company’s payroll software will generate and validate the required information.
Payroll deduction loans can come in handy for paying for substantial purchases. You can also use them for unexpected expenses or brief gaps in income.
However, they’re not enough to cover recurring budgetary needs, they have high interest rates and short repayment terms, and if you lose your job, you’re still required to pay back the loan. Instead of depending on payroll deduction loans, find alternative ways to boost your financial stability. It helps to pay your debt and find additional sources of income.
Here are the pros and cons of payroll deduction loans to help you understand if they’re right for your needs:
Pros
- There’s no risk of late payments and penalties because monthly repayments are automatically deducted from your paycheck.
- You don’t have to worry about your credit score or history because employment is the top requirement for loan approval.
- There’s a lower borrowing cost because there’s a lower risk of default.
Cons
- You’ll have less take-home pay and less money for other daily needs.
- They could come with fees and often have higher interest rates than traditional loans.
- You must be in your current position for at least three months to qualify for approval.
- Professionals in the gig economy might not be eligible for a loan.
- Glaring delinquencies on your credit report might hinder you from getting approved.
- You might not get approved if your company fails to provide or verify the required information.
- Some lenders require that your company initiate contact before starting the approval process.
- Repayment terms are often short, making it hard to pay back the loan.
- Borrowing amounts are capped to a certain percentage of the borrower’s salary.
- If the borrower loses their job, they are still required to pay the loan back.
While they have advantages, payroll deduction loans aren’t for everyone. They come with strict eligibility requirements, and their fees and repayment terms might be too heavy on the pocket. It’s worth exploring alternatives that suit your employment situation and financial capabilities.
Common Payroll Deductions
Understand where your hard-earned money is going each month – here are some common payroll deductions you should know about and their purpose.
What Are Examples Of Standard Payroll Deductions?
If you’re considering a payroll deduction loan, the monthly repayments would come from your take-home pay. However, that’s not the only deduction you’ll have on your paycheck. Other payroll deductions, whether mandatory or optional, will affect your net pay.
Here are common payroll deductions to consider before you get a payroll deduction loan.
Federal Income Tax
Federal income tax is a percentage of an employee’s income based on their taxable income, marital status, and number of claimed allowances. Employees specify the amount they want to withhold for their federal taxes on the Form W-4. A higher amount lessens their take-home pay but could lead to a year-end tax refund. Meanwhile, a lower amount means higher net pay but could result in penalties.
State Income Tax
Employees are under the state income tax law of the state in which they are working, which varies by state. If you work across state lines, though, your state income tax might go to your state of residence. Low-income employees or those with personal exemptions might not have to pay state income tax.
Social Security & Medicare Tax
Social Security and Medicare are examples of employee benefits that pay off later in life. Social Security income deductions go toward retirement and disability funds along with family and survivor benefits.
An employees’ taxable income dictates the amount that must be paid. Under the law, employees pay 6.2% of the first $176,100 they earn yearly. Anything beyond that isn’t subject to Social Security deductions.
Meanwhile, Medicare taxes go toward hospital and nursing care, Social Security disability benefits, and doctor’s fees for senior citizens. The federal law requires employees to pay 1.45% of their annual wages regardless of how much they earn. However, there’s a 0.9% surtax for individuals who earn more than $200,000.
For additional details on Social Security and Medicare withholdings rates, visit the IRS website.
Wage Garnishments
An employee might have to pay for wage garnishments under a court order or IRS directions. These funds will cover child support or unpaid taxes or debts.
What Is The Difference Between A Payroll Advance & A Loan?
A payroll advance is an agreement between an employer and an employee. The employer agrees to give early access to an employee’s salary, possibly weeks in advance. The employee then repays the short-term loan in installments using their salary. Unlike a payroll deduction loan, payroll advances are usually interest-free.
While third-party lenders create the conditions for a payroll deduction loan, employers dictate the requirements for a payroll advance. Eligibility criteria could include employee status and length of employment. Employers also define the repayment terms, ensuring employees can repay the loan promptly.
Can Your Employer Give You A Personal Loan?
Not all companies offer personal loans to their employees. For those who do, there are no set standards to go by. Personal loan requirements and repayment terms differ widely per employer. However, the application process might be similar to a traditional personal loan, where you’ll submit a loan application, wait for approval, and receive the money in your bank account if approved.
So, how do personal loans work? Employers offer unsecured personal loans through a third-party lender. However, they might provide the loan if they’re a financial institution.
Employers define the eligibility requirements, minimum and maximum amounts, and interest rates, if any. You might have to work a set number of years for your employer if you decide to get a personal loan from them.
Alternatives To Payroll Deduction Loans
If you need extra funds, here are some other options to consider:
Personal Loan
You can go to a bank, online lender, or credit union and apply for a personal loan. It is usually unsecured, meaning a personal loan doesn’t require collateral. However, you must meet certain eligibility requirements to qualify.
Credit Card
If you don’t need a substantial amount of money, a credit card could suffice to cover expenses. Using a credit card will save you from the hassle of applying for a loan and stressing over your credit score. You can also consider a credit card cash advance if you need cash immediately.
Home Equity Loan Or Home Equity Line Of Credit
If you have built equity in your home, you can apply for a home equity loan or home equity line of credit (HELOC). While home equity options usually offers appealing interest rates, your home will be up as collateral, which means you could lose it if you’re unable to repay your loan.
Explore Your Loan Options At A+ Federal Credit Union
You don’t have to limit yourself to a payroll deduction loan. There are more favorable loan options available on the market. At A+ Federal Credit Union, you’ll work closely with a lending expert who will help you choose the loan that best suits your financial needs and goals.
With the A+ Personal Loan, you have the flexibility to choose how to use the funds – whether it’s for a home renovation, consolidating debt, or covering education expenses. Additionally, you can turn your home’s equity into cash with an A+ Home Equity Loan at competitive rates, making it easier to take care of those long-overdue repairs. There’s also the A+ Preferred Line of Credit that’s ideal for those seeking a generous credit limit for life’s unexpected expenses.
Apply For A Personal Loan
Enjoy more freedom with your money. Use an A+ Personal Loan for your personal expenses at a great low rate.
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