A well-functioning employment relationship between employer and employee is based on trust, good performance and reliability on both sides. Therefore, employers sometimes grant loans to the employee on particularly favorable terms. This loan is often used to finance training or finance home ownership.
Employer loans: What needs to be regulated in the contract?
An employer loan is by no means a consideration for special services or merits. It is the granting of a “normal” credit – only by the employer and at much more favorable terms. However, the employer must respect the principle of equal treatment when granting employer loans. This means that he can not distinguish between part-time and full-time employees when lending and setting the rate of interest. However, employers may very well refuse a loan application if, for example, individual employees are over-indebted or if they already have wage garnishments.
For tax and legal reasons, the loan agreement between employee and employer should be concluded in writing. The following points must be regulated:
- the amount of the loan
- the interest rate. If it is missing, the loan is granted without interest.
- the repayment term and the monthly repayment installment
- the notice period, cancellation requirements
- the possibility of a free special repayment
The interest advantage between the agreed and customary market interest rate is regarded as a pecuniary benefit and must be taxed as such. It compares the APR to be paid by the employee at 96 per cent of the actual interest rate. This creates a monetary benefit of four percent. If this interest advantage does not exceed the tax-exempt limit of 44 euros in the calendar month, then it remains tax-free.
In most cases, the repayment of the employer’s loan is offset against the current salary. Here, the legal attachment exemption limits must be observed. Because the repayment rate may not consume the full salary of the employee.
If the last monthly installment is paid, it is the duty of the employer to terminate the contract. In the event that the employment relationship is terminated during the contract period, the employee does not necessarily have to repay the entire amount at once. Only after expiry of the statutory period of notice can the employer reclaim the full loan amount.
On the other hand, agreements are inadmissible in the event of termination of the employment relationship:
- provide for an immediate repayment of the entire loan (inadmissible, as the severity of dismissal for the employee)
- as well as excessive interest rates and unsustainable payment burdens.
However, the employer may very well, if the employee terminates the contract, demand a standard market interest rate that can be significantly higher than the agreed interest rate.
Not to be confused with advances and advance payments
Employer loans are not advances or advance payments. Advances are benefits that have been paid out to an unearned salary and will be repaid in the foreseeable future. Advance payments are prepayments on an already earned but not yet paid out salary payment.
Demarcation of employer loans from other benefits
According to the Federal Ministry of Finance, an employer loan is a grant of money by the employer or a third party to an employee, in which case the reason for the transfer must be mentioned.
No employer loans are therefore:
- Advances (travel expenses)
- Benefits on reimbursement of expenses
- as well as payroll salaries
The employer loan in the public sector is a cheap alternative to traditional bank credit. The basis of a successful employment relationship between employee and employer is good performance, trust and the reliability of both parties.
For this reason, it may happen that the employer grants a loan to an employee, which is characterized by particularly good conditions. In this way, the employer binds the people who work for him to the company and gives them a kind of appreciation. This form of credit is often used to purchase a home or to take advantage of a training measure. In most cases, these loans are tied to a specific purpose.
For whom is the loan suitable?
First of all, it is important to know which group of people can claim this particular loan. The public service can also be described as civil service. This term refers to the field of activity of civil servants, salaried employees (employees of institutions, public bodies or foundations) and other employed persons under public law (such as judicial trainees, judges and soldiers).
A loan granted by an employer is definitely not a consideration that can be obtained for a particular merit or achievement. A normal loan is granted, the lender is in this case only the employer.
In addition, the allocation of this particular financial product happens at significantly better terms than other loans. For the employer, the principle of equal treatment applies when lending. Therefore, he can not distinguish between full-time and part-time employees if he sets the rate of return. However, if a worker is over-indebted or even has a lien, the employer may reject a loan application.
Demarcation of the loan in the public service
This financial product must not be confused with advance payments and advances. The installment payment corresponds to a payment that relates to the salary that has not yet been settled but already earned. For payments that fluctuate or for late payroll, advance payments can be agreed. Advances are payments that relate to the salary that has not yet been earned and that will be repaid in the foreseeable future. The legislator sees this form of payment only as a time shift for a payment of the proper wage.
In addition, it is important to be able to distinguish this financial product from the other benefits. According to the Ministry of Finance, this type of loan is a case in which a sum of money is granted by the employer. There is also the possibility that the lender is a third party, but here a use must be mentioned. Incentive salary deductions as wages, benefits on reimbursement of expenses or advances (travel expenses) are not covered by this form of credit.
No pure official credit
Not only the officials have a civil servant loan available. Employees can also use it if they are civil servants. However, this professional group requires proof that employment in this field of activity has existed for at least 5 years. The conclusion of a loan for civil servants is only possible if this period is taken into account.
This special loan gives employees of the civil service decisive advantages, which not only refer to the favorable conditions, but also to the planning security. A variety of providers awards these loans.
For this group of persons as borrowers, the interest rates are predominantly below the interest rates of traditional loans. On the one hand, this reduces the extra financial burden of receiving a loan and, on the other hand, it can also call for higher sums of credit.
What else is there to consider?
The following section describes 5 aspects that should be known in the context of this particular form of credit.
Pay attention to the written form
Loan agreements between employer and employee should always be in writing for legal and tax reasons. For some aspects there must be a regulation: the amount of the loan, the interest rate, the term of the loan, the monthly repayment installment, the conditions for cancellation, the notice period and the possibility of free special repayment. If no interest rate is set, there will be an interest-free granting of the loan.
What happens at notice / job change
If a borrower leaves the employment relationship, the loan does not automatically have to be repaid immediately. Unless there is a specific and explicit agreement between the lender and the borrower, the loan agreement will continue to operate on the terms set forth upon the conclusion of the contract. Whether the employment relationship is resolved amicably, on time or without notice does not matter.
The financial product can be terminated if the notice period is considered. This provision does not apply if both parties have agreed on an exact repayment date or repayment modalities exist. However, if a fixed date for repayment or a monthly repayment installment has been set at the time the contract is concluded, this provision will apply in the event of termination of the employment relationship.
For the employee there is the obligation to meet the repayment date or to pay the monthly installments on time. The employer can not terminate the loan agreement prematurely in such cases.
Consider special repayment
A peculiarity of this form of credit is that public sector employees have the option of special repayment at any time. The individual debts can be reduced easily and quickly. A special repayment is usually not associated with other costs. The borrowers can thus choose between two options, the loan can be partially or completely redeemed. In the case of special repayment, this financial product also incurs no prepayment interest.
In addition to the loan agreement, endowment life insurance is concluded, which can be used, among other things, to repay the capital.
Pay attention to the correct control
When awarding a low-interest or interest-free financial product in the public sector, the interest advantage (non-cash benefit) must be determined because the employee must pay tax on it as a wage. The benefits in relation to the interest paid to the borrower are included in non-monetary benefits.
Ultimately, they must also be taxed as such. However, this taxation only applies if the amount of money not yet repaid is greater than 2600 euros at the end of the pay period. However, there are special tax exemptions with regard to tax assessment. However, the employee does not receive an interest advantage which is considered as taxable if a loan is granted at an interest rate which is customary in the market. For a tax-correct procedure the advice with a tax consultant can be advantageous. For a tax-correct approach, the advice of a tax adviser, be beneficial.
Benefit from committed interest rates and long maturity
Civil servants and civil servants can improve their solvency when taking such a loan. The low interest rate and long maturities allow low rates to be paid each month. The maturities of this financial product are mostly 20 years or more.
The safe and simple structure leads to optimal planning security. The reason for this is that interest rates are usually fixed throughout the term. As a result, the regularly payable installments receive stability and can be considered as a fixed monthly expense. This form of loan is usually a cheap way to raise capital when buying a property.
A consultation with the financial expert should be used in such an approach, as there are different combinations regarding the different forms of loans for real estate and subsidies. When buying a living space, this step guarantees a process that is optimal for consumption.