Payday loans have never been the dandy of consumer advocates who say the short-term, high-interest loans can trap people in cycles of debt.
Defenders of the loans, however, say payday loans fulfill an essential need for a temporary financial need — such as a car repair.
But now there is a new type of loan surfacing across America. They are called workplace loans and some experts fear that they are just as bad as payday loans.
The Wall Street Journal, using industry-provided information, estimated that more than 100,000 employees in the United States have access to workplace loans — a number that could expand to more than 10 million employees in a few years. But while the types of payday loans do not have a lot of differences, workplace loans can be all over the spectrum.
"Workplace loans come in a lot of different varieties," said Lauren Saunders, associate director of the National Consumer Law Center, a consumer advocacy group in Boston. "They run the gamut. Some are similar to payday loans with high interest rates and a short term. Others have lower rates with longer terms."
Available to employees through their workplaces, the loans are offered by third parties — alternative lending companies that may be contracting with other lenders such as credit unions or banks. The employers tout the loans in the same way they might talk about a health and wellness program.
"It is pitched as part of a benefits package," Saunders said. "And certainly employers know that their employees may struggle with expenses from time to time. And it may sound like a good thing, and some of them are. I don't want to condemn them all."
Like payday loans?
Employers offering financial products to employees is nothing new. In the early part of the 20th century, mining and other companies offered employees scrip or company "money" that could be used in the company store to purchase items. The high prices led some workers to feel like they sold their "soul to the company store," as the song goes.
Technically, this "money" was similar to an advance on wages, a practice that many employers may give to workers who fall on hard times.
The twist is that workplace loans can be set up to take the money directly out of the borrower's paycheck. There are other methods of paying back the loan, but this feature is the most troubling to Nasir N. Pasha, the managing attorney for Pasha Law, a law firm that specializes in workplace law in San Diego. "It doesn't seem right to me," he said. "It is like borrowing money against their future wages. That seems troublesome. It is getting close to being an indentured servant — it isn't quite there, but on the spectrum of things it is moving closer to that."
Pasha worries that employees in lower-paying jobs may be tempted to use the loans to meet everyday expenses. He also sees similarities between the loans and how some employees will occasionally ask for an advance on their wages.
"For an employee it is attractive to get a loan from an employer," he said. "But that really changes the dynamic. It is like borrowing money from friends. You shouldn't do that — especially if it is a long-term relationship."
Richard W. Evans, an assistant professor of economics at Brigham Young University who did some consulting work for payday lenders back in 2009 and 2010, says the "smell test" for workplace loans is "if you see it tied to budgeting and helping consumers change their behavior then it sounds altruistic."
Less than one year ago, the Hyatt Regency hotel in New Orleans began offering workplace lending as part of a larger employee financial wellness program offered by Emerge Workplace Solutions Inc., based in Nashville, and funded by Liberty Bank in New Orleans.
La Tonya Hunter, the hotel's human resources director, has seen employees take advantage of the unique lending program in the few months it has been available. "Emerge offers short-term lending with low interest rates for emergency situations, and about 20 to 30 employees have utilized Emerge services since its inception," Hunter says. “However, the program is about more than lending. It also provides associates with education on planning and saving, at no cost.” Emerge Workplace Solutions' financial planners also help hotel employees manage budgets, assess their current finances and discuss saving for retirement.
But Evans isn't optimistic that workplace loans will solve the problems of debt for some people. For example, some people wouldn't even have the option to borrow against a 401(k).
"There is something fundamental about some borrowers," he said. "Some of us can't handle debt."
To help somebody stuck in debt, he said, requires somebody to take a risk on that person — and, from a business perspective, often that person will not merit the risk, Evans said. "It is really a tricky problem," he said. "It is hard to find market solutions to that problem."
Bankruptcy is a government solution, he said. But other solutions may require charity.
Like Pasha, Saunders with the National Consumer Law Center doesn't like the idea of workplace loans being used for everyday expenses. She said that it may be that employers could have a role to play in providing "low cost, safe loans for occasional use." But she warns that the interest rates need to be lower, 36 percent or below. And the loans should not require budget-destroying lump sum payments, but smaller payments. She also advocates that the loans be restricted to once or twice a year.
Having the money taken directly out of the paycheck also bothers her. She said employees should be in control of how they pay.
"I have seen too many (workplace loans) that are very expensive, lead to a cycle of debt and skim the employees' pay in a way that could make it difficult for them to meet necessities," she said.
Evans, however, said that having the money come directly from the paycheck may be precisely the "collateral" that keeps the interest rates down.
Staying out of trouble
He also points out that one of the appeals of payday loans is that, for the most part, they are outside normal credit reporting. There is an anonymous aspect of taking out payday loans. Getting a workplace loan removes that secret aspect of the borrowing. "But if you are doing it at your workplace, it is almost like a signal that you are in trouble," he said. "And that is a bad thing to signal to your employer, that you are in trouble."
Staying out of trouble in the first place is the best solution, according to Saunders.
Like Evans, she gives some deference to workplace loans that are closely tied into financial well-being and budgeting programs at work. But the better route is for employers to take preventative measures to help employees.
"An employer is better off promoting savings programs than promoting loans," Saunders said. "The workplace is a great place to promote savings programs."
Instead of taking small payments over time to pay off a loan, workplaces could encourage employees to set up automatic payments into savings accounts — before a loan might be needed. Saunders points out that many so-called unexpected expenses are expected — such as an older car breaking down.
"Credit is not the answer," Saunders said. "Taking on more debt is not the answer."