Salary Advances & Loans to Employees: All You Need to Know

Sometimes, employees find it difficult to manage their expenses with their salaries due to family emergencies, which undoubtedly can’t be ignored. In that case, the employee’s mental capabilities also get compromised, which is not good for the organisation. However, the organisation can easily prevent this from happening by introducing loans and advance salaries for employees. 

These two employee benefits allow the employees to take a loan or one month’s salary in advance to battle the odds. But as an organisation or as an employee, it’s important that you understand the meaning of these terms and everything about them. So, in this blog, you’ll learn what these two employee benefits are and how they work. Moreover, you’ll also learn the way to create a loan and salary advance policy. 

What is a Salary Advance?

As an employer, you can provide a short-term loan to your employee, which is known as a salary advance. This loan allows your employee to receive a portion of their upcoming paycheck ahead of their payday. In this, your employees typically request salary advances during their financial emergencies like unexpected medical expenses or other urgent needs. A salary advance comes with its own benefits, which are listed below.

Benefits

• For Employees:

Your employees can get quick access to funds without any high-interest loans. Hence, it helps them to manage their emergencies effectively.

• For Employers:

As an employer, granting a salary advance will increase your employee’s loyalty and morale because of your timely financial support.

What is an Employee Loan?

In an employee loan, you make a formal financial agreement to lend your employee a specific amount of money. This money has to be repaid by your employee over a set period of time. Mostly, it is repaid through deductions in the employee’s payroll. Employee loans are usually for larger amounts, and the repayment terms are also longer for it. An employee loan also has some benefits, like 

Benefits

• For Employees:

Your employee can get significant funds for major expenses like education, home improvement or medical bills. Moreover, they also get the benefit of taking a loan at lower interest rates than commercial loans.

• For Employers:

You get the opportunity to support your employees’ financial well-being. This will also increase your employee retention and satisfaction.

Comparison: Salary Advances Vs Employee Loans

As an employer, you can offer salary advances and employee loans as financial benefits to your employees. However, both of these differ from each other in terms of their structure, purpose and impact on both parties involved. So, let’s understand the differences between the two to manage these benefits effectively.

1) Amount

• Salary Advances:

Typically, salary advances are given in smaller amounts. Moreover, these can be repaid in portions through the employee’s future paychecks. The exact amount may vary depending on your company’s policy. However, it is generally limited to what your employee has already earned in the current pay period.

• Employee Loans:

These are larger sums of money that are usually several times your employee’s salary. An employee loan is usually for significant financial needs. Furthermore, it is more structured and is similar to traditional loans.

2) Repayment Terms

• Salary Advances:

The repayment terms for salary advances are short. In fact, it is often only until the next payday or within the next one or two paydays. Hence, it is a short-term solution if your employee has an immediate cash need.

• Employee Loans:

For employee loans, the repayment terms are much longer. It can even span from several months to a few years. Moreover, the repaying is usually done through payroll deductions. So, it becomes convenient for the employees, but it also requires a long-term commitment.

Situations Where Your Employee May Prefer One Over the Other

1) Salary Advances

• Emergencies: When an employee faces an immediate financial crisis and needs quick access to funds, a salary advance becomes preferable. This is because salary advances are simple and have a quick turnaround time.
• Minor Expenses: It is also suitable to prefer salary advance for smaller or one-time expenses that an employee can repay quickly,

2) Employee Loans

• Major Expenses: Your employee can need a major amount of money for expenses like buying a car, funding education, or renovating a home. In such situations, an employee loan is more suitable because it has a longer repayment period. So the employee will not feel the burden of repaying such a large sum.
• Debt Consolidation: Employee loans are also preferred when an employee is looking to merge high-interest debts into a single payment. In such a situation, employee loans become beneficial as they come with a lower rate of interest than credit cards or personal loans from banks.

What is an Advance Salary Adjustment on Payslip?

Advance salary adjustment is the process by which the advance salary is deducted by the company at source. In this, gross salary is calculated without any deduction like TDS, provident fund, etc. Once the salary is calculated, the advance salary instalment is deducted along with other deductions. So, it shows up after the gross salary and before the net salary on the payslip. 

What is GTIL Recovery?

Just like a company offers a salary advance or loan, it can also be taken from the GTIL or Gratuity Trust In India. This trust is formed by companies to keep the gratuity funds of employees and can’t be used by the company. It plays an important role in making sure that the employees’ gratuities are safe and will be paid on time. Now, while companies can not spend these funds, the employees can get advances and loans from this fund, and the instalments are deducted from their salary. Now, this dedication is shown as GTIL recovery on the payslip. Hence, this is what GTIL recovery means on a salary slip. 

How to Create a Loan and Salary Advance Policy for Employees?

Let’s now look at the process of efficient salary advances and loan policies. \

1) Purpose of Policy

First, define the purpose of the policy, and you need to write why the policy exists. There has to be an explanation of why the company offers a loan and salary advance. It will help the employees to learn that such a feature exists in their company. Moreover, it also prevents the misuse of the policy. You can also list the most common reasons for which salary advances and loans can be taken. The reasons can be financial assistance, medical issues, or other emergencies.

2) Eligibility Criteria

Now, create an eligibility criteria table to define what are the requirements for the loan and salary advance. It includes factors like length of employment, employee type, and performance. For example, you can state that an employee who has completed 2 years in the organisation and is a permanent employee can take a loan or salary advance. 

3) Types of Advances and Loans

In this section, you have to define the types of loans and advances. While there’s only one type of salary advance, there can be two types of loans: long-term and short-term loans. So, you must specify the minimum and maximum duration of loans and the foreclosure policy. Moreover, also mentions the interest that will be charged on the loan. 

4) Application Process

Then, mention the application process where you should define the mode of application along with the documents and proofs needed for the application. 

5) Repayment Process

In this section, I wrote about the repayment policies for salary advances and loans. You should mention if the payment will be deducted from the salary or if the employee will have to make the payment in case of a loan. Also, let them know about the consequences of late payments or not repaying the loan at all. 

This is how you create an efficient loan and salary advance policy for employees. Keep in mind that this loan and salary advance policy is being shared with them at the time of their joining and as soon as possible for the employees who are already working in the organisation. 

Conclusion

To sum up, salary advances and loans are an important part of an organisation that empowers its employees. Moreover, as you can see, it has benefits for both parties. However, you must make sure that there’s a well-defined policy for the scheme, as otherwise, the employee can misuse it, or the employer may exploit the employee due to an undefined policy. Also, it is important to show the deductions on employees’ payslips.