Employee Loan Agreement Template

If you are lending an employee money or borrowing money from your company, you might need to use an employee loan agreement template. It will ensure that everyone is on the same page and that you are financially protected if any issues arise.

What is an Employee Loan Agreement?

An employee loan agreement is a contract to use when a company lends money to one of its employees. Employees may borrow money from a company if they need money for a large life expense like school tuition or buying a home. They may also ask for a loan when they need money for emergencies such as for rent, car payments, or medical expenses. Regardless of the reason why an employee may borrow the money, they will be expected to pay back the loan with interest over a specified period of time.

When to Use an Employee Loan Agreement

An employee loan agreement can be used when an employee is borrowing money for any expense, whether it be large or small. If the employee is expected to pay back interest or pay certain monthly payments, there should also be an agreement for this. Use this type of loan agreement template any time an employee is borrowing money from their employer.

Pros and Cons of Using an Employee Loan Agreement

Like with any loan or financial lending, there are some pros and cons for both parties. Both are taking a risk when borrowing or lending money.

Employer’s Perspective

One of the main benefits is that loaning an employee money helps you get to know that person better and will aid in forming better relationships with the employees. It helps you see them as real people and know their struggles.    It will also promote the company’s image. A company that is known for helping its employees and willing to be there when they are in need adds to the company’s reputation.    An employee who is experiencing financial burdens may be more likely to be distracted at work or feel overwhelmed. Both of these will hinder their work performance. Loaning money to help them get over the financial hurdle can increase their productivity.    Just like any time you lend money, there is a risk of not getting it back. Even if it is deducted from their paycheck, they can still quit the job, so they don’t have to continue paying the loan back. The company can also begin to face more loan requests as employees find out that a loan was given. If the company gives out loans to some people but not others, this could be viewed as discrimination.    Lending money to employees can also complicate your taxes. This is more likely if the loan is not given out correctly or filed with the right paperwork. Make sure to go over employee loan procedures with the company accountant or financial consultant.

Employee’s Perspective

Similar to the employer, the employee will have a better connection and relationship to their corporate office when borrowing money. They may also get to know their boss better and form closer relationships. The company lending money to them may also make them feel more confident and prouder about where they work. This can enhance their work productivity and reputation.    Taking away their financial burden can also make them feel better about going to work and give them a safe space to grow and flourish. It can also make them promote the company image to other people.    If they are unable to pay the money back, they may begin to feel embarrassed about talking to someone about it or may stop showing up to work. They might also feel like they are forced to quit and default on the loan. They will then lose their job and have a negative impact on their finances and credit score.

What Should Be Included in an Employee Loan Agreement

There are several steps you can take to begin loaning money to an employee. Some very important items need to be included in the employee loan agreement for it to be recorded correctly.

Talk to the employee

This will help the employer to know how much money is needed and what negotiations might need to be made. It will also help them to know what to include in the agreement and the financial struggles of the employee.

Discuss the loan procedures

Some companies may already have policies in place that inform employees about what kind of loans they qualify for and the maximum amount of money they are entitled to. It should also cover the rules and process for applying for the loan and receiving the funds.

Set the rate

Most interest rates for loans above $10,000 are entitled to be charged the applicable federal rate (AFR). The company may need to do some research on the IRS website or discuss with their financial consultant what this number might be.

Sign the agreement

This is when you begin using the template and fill it in with the information that was discussed with the employee and other company members. Having a template allows the company to fill out the fields easier and will take less time each time there is a new borrower.    Every loan agreement should have:

  • Name of the employer
  • Name of the employee
  • The date of the agreement
  • The loan amount in numbers and words
  • The dollar amount that the employer is deducting from each of the employee’s paychecks
  • The date of the first payment
  • The terms and conditions in case there is a default of the loan or if the employee quits.
  • Signature of both the employee and employer

Keep the records

The employee and employer should both keep a record of the loan agreement on file. It should be kept in a secure place and be with the company’s books. If the loan will be paid back within a year, it is usually filed with the current assets. If it will take longer than a year to pay back, it will be considered a long-term asset.

Filling Out the Employee Loan Agreement

Filling out the employee loan agreement is straightforward and won’t take too long once you have gathered all the information.

Indicate the parties 

Under the parties heading you will fill in the information of both the employer and employee. This includes their names and addresses.

Indicate the loan amount 

In this box, you will write out the loan amount. You can then write the numerical amount next to it. Also include the date that the agreement is being signed.

Indicate the payment and interest rules 

Here you will include the payment or paycheck deduction amount. You will also write the date that the payments start and the interest rate of the loan.

Indicate the state 

Include the state where the agreement is taking place. The loan will need to follow the laws and rules of this state.

Additional terms 

State in plain writing any additional terms or conditions that have been agreed upon by both parties.

Signatures 

The employee and employer will both sign and print their names. One or two witnesses are also required to print and sign their names below the employer’s signature.

Published: Aug 5, 2021