Payroll Deduction Loans: An Over Simplified Guide

December 18, 2022

payroll deduction loans

To understand what payroll deduction loans are, how they work, and how you can apply for them, it’s important that you know the bottom line first.

Ideally, payroll deduction loans can save you money and protect you from unscrupulous lenders. Instead of employing sophisticated algorithms to determine a three-digit credit score, lenders consider your employment history and experience as part of their screening procedures.

Now that you understand how such a loan may be beneficial, let’s learn more about:

  • What it is
  • How it works
  • How to apply
  • The advantage and drawbacks
  • Alternative options

Let’s get started.

Key Takeaways

  • With these loans, you can qualify for a loan even if you have a low credit score or a thin credit history.
  • You can use the loans for just about anything.

What are Payroll Deduction Loans?

The only difference between payroll deduction loans and standard loans is that loan repayments are deducted monthly from the borrower’s paycheck. Some payroll deduction lenders may utilize cash flow, income, and payroll data in lieu of credit scores to accept or refuse applications.

The purpose of these loans is to enable employees to manage short-term financial difficulties that interfere with their ability to concentrate or perform to the best of their abilities.

The method is straightforward, and obtaining a payroll deduction loan is as easy as entering into your account and filling out a one-minute application.

How You Can Utilize a Payroll Deduction Loans

According a studies conducted by Nicholas Bianchi, around 32% of payroll deduction loan borrowers utilize the loans to cover unanticipated needs or bridge brief budgetary or income gaps, whereas just 9% use them for substantial, important purchases.

In this respect, a payroll deduction loan can only be of limited assistance to borrowers who have recurring income gaps.

To improve your financial stability, it is essential to discover longer-term alternatives, such as strategies to grow your income, lower your debt, or save and invest more money.

How to Apply for a Loan with Payroll Deduction

The application process for a payroll deduction loan is comparable to that of other loans.

The primary distinction is that your company’s payroll software is responsible for generating and validating your income, employment, and payroll deductions.

During the loan application process, one of the procedures will include linking your payroll account by entering your credentials. There is a basic method for discovering your details if you do not already know them.

The loan application shouldn’t take more than a few minutes.

You will need to provide the following information when filling out your application:

  • Amount of the loan
  • Length of the loan
  • Your name, email, date of birth
  • Social Security Number
  • Phone number
  • Current and previous address
  • Employer name
  • Income, supplemental Income, and pay cycle

Advantages of Payroll Deduction Loans

  • Repayments are performed through paycheck deductions, which facilitates on-time payment.
  • The loans have a lower cost of borrowing since the risk of default is smaller.
  • You are eligible for a payroll deduction loan regardless of your credit score or credit history. The most important necessity is a solid employment.
  • You can receive payments within twenty-four hours.

Disadvantages of Payroll Deduction Loans

  • To qualify, you must have a stable employment for at least three months.
  • If you have substantial delinquencies on your credit report, you may not be eligible for this offer.
  • If fraud is obvious or if your lender has trouble verifying your employment, you may not get a loan.
  • Some lenders require that your firm initiate contact with them before you may obtain the loans.
  • Some employees in the gig economy may not be eligible for payroll deduction loans.

How Does Payroll Deduction Loans Affect Credit?

Similar to other forms of loans, payroll deduction lenders record each payment to the three major credit agencies.

By collecting repayment through salary deductions, many individuals believe that these sorts of loans are less stressful since they help them pay on time and enhance their credit score.

Making payments on time affects the largest portion of your credit score: your payment history.

In addition, you receive points for diversifying your credit portfolio and adding fresh credit to it. If you continue to make payments on time, your credit score should increase within a few months.

Are There Alternatives to Payroll Deduction Loans?

There exist alternatives to payroll deduction loans, but they have their drawbacks:

Payday Loans

According to FINRA research on financial competence, 29% of Americans had utilized payday loans, auto-title loans, pawnshops, and rent-to-own businesses.

The problem is:

These alternative lending sources generally cost 10 times as much as a person with an exceptional or premier credit score would spend.

A $400 payday loan repaid over three months at an APR of 391% would cost around $684 in total. High-interest loans with limited payback terms can trap borrowers in difficult-to-escape debt cycles.

Payday loans are predatory, costly, and must be avoided at all costs in comparison to payroll deduction loans.

2. Bank Overdraft

A further option to payroll deduction loans is bank overdrafts.

Each year, about one-third of checking accounts in the United States are overdrawn, and roughly eight percent of accounts are overdrawn more than ten times.

Typically, overdraft fees are highly expensive.

For instance, a $35 overdraft fee, which is the average, may result in an APR as high as 17,000%, which is far higher than the 5.9% – 19.9% offered by payroll deduction loans.

3. Pension Withdrawals

Another alternative is to withdraw funds from your retirement account, although this is often the most expensive choice in the end, due to the compounding impact of interest.

People who suffer financial emergencies and unanticipated costs are more likely to withdraw funds from their retirement accounts than those who do not.

A withdrawal of $10,000 might result in as much as $43,000 in lost savings after 30 years. If you are not careful, defaulting on your retirement loans might potentially result in tax penalties.

Bottom Line

If you need affordable access to credit, you should strongly consider a payroll deduction loan. Say goodbye to financial stress, and hello to financial wellness.   

About the author 

Antony W is a professional writer and coach at Help for Assessment. He spends countless hours every day researching and writing great content filled with expert advice on how to write engaging essays, research papers, and assignments.

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