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ShareThere are several advantages besides the fact that interest rates are lower
MUMBAI: At a time when interest rates on personal loans and car loans are shooting through the roof, a loan from your employer may be a godsend.
The rates of interest charged on these loans are at least a few percentage points lower than those going in the market.
What's more, many employers charge a simple interest, rather than compounding, and the repayment periods are also quite flexible, though typically ranging between one and three years.
You can also save on the processing fee charged by banks, which could be anywhere between 1% and 2.5% of the loan amount.
All, so repayment may be easy on the employee. Indeed, many employers count cheap loans among the benefits offered by them.
So, if you are seeking a small amount of money to meet immediate requirements, nothing works like a loan from your employer.
Typically, a loan of up to Rs 50,000, whether for buying a laptop, or meeting education or medical needs, may come at a 2.5-4% interest, while higher amounts may be granted at around 5-8%.
However, the specifics differ from company to company. Some might hand out much bigger amounts at lower rates of interest.
Tax aspect
One needs to know that there is a tax angle to such loans.
As per the prevailing income-tax rules, loans granted at subsidised rates of interest are treated as perquisites. So, an employee taking the loan has to pay a tax on the difference between the market rate and the rate offered by the employer.
The income tax department currently uses 10% as a benchmark rate and if your employer is offering a lower rate, you will have to pay tax to that limit. The tax is levied on the assumption that you would have had to pay higher interest had you borrowed from the market and so the money saved to that extent becomes a part of your income.
Say your employer is offering you an interest rate of 4% on a loan of Rs 1 lakh, to be repaid in two years. In this case, the differential interest ofRs 6,000 (at a differential interest rate of 6% (10%-4%) on Rs 1 lakh) would be added to your income and taxed accordingly. Thus, someone in the 10% tax bracket would have to pay Rs 600
as tax, while those in the 20%bracket would have to pay Rs 1,200 and so on.
In the second year of the loan tenure, the 6% differential rate (if market rate is unchanged by the I-T department) would be calculated on the amount which is yet to be repaid and not on the entire loan amount. So if you have repaid Rs 55,000 of principal in the first year, then Rs 2,700 would be added to your income and taxed according to the tax bracket.
Eligibility
The loan amount sanctioned by the employer could be a function of your income as also of the period for which you have worked with the company. Where things are a little less organised, even your relationship with the human resources department can be a decider.
Perchance, you would have to disclose the purpose for which the loan is required, unlike in case of a loan from a bank. In their aggression to lend, many banks are known to ignore such details.
Knowing the purpose of the loan is necessary to determine whether it is compulsory spending for which the employee should get assistance.
For instance, most employers don't provide large sums for marriages as it is not a compulsory spending. Going by an HR professional, "Marriages can be done in a court as well at a minimal cost, but a medical emergency cannot wait for money."
Hence, the employer may even call for documents supporting your need.
Most offices do not offer more than one loan to the same employee. So, if you have already taken one, but need another, you might just have to pay up the first loan before the second loan can come your way.
In this case, there may also be restrictions as to the period intervening repayment of the first loan and start of the second.
There might also be a cap on the number of times an employee can take a particular kind of loan.
Clearance of the loan could take as much time as in case of a bank. But, since it is your office, there is always a possibility of expediting loan processing in case there is an emergency, unlike in a bank.
Repayment
What if you are to quit the company before the loan tenure is over? You would of course have to pay back the entire loan.
But, over and above that, you would have to fork out a penalty for quitting. This may be comparable to the prepayment penalty banks levy. Usually, the penalty charged is between 5-7% of the loan amount, but with attrition rate on the rise companies have been charging much steeper penalties on loans to employees. So much so, it could be as high as 15%.
