Americans are stressed financially.
A 2023 survey found that finances were the top source of stress for 57 percent of U.S. workers, while 59 percent said their compensation was not keeping pace with living expenses. Among workers indicating financial stress, 44 percent said that this stress is a distraction at work. Similarly, a 2024 FINRA Foundation study found that over half (52 percent) of employees spend at least one hour a week at work thinking about their financial problems.
One solution that employers are increasingly looking to is employer-sponsored small-dollar loans (ESSDLs). An ESSDL is typically a personal loan of up to $2,000 with a term of 3 to 12 months, automatic repayment and credit reporting, all at a rate far below predatory alternatives. The loan is made by a credit union or other financial institution, with the employer making the connection to the employee-borrower.
Filene Research Institute has partnered with the FINRA Foundation to delve into ESSDLs. We spoke with credit unions, employers and borrowers to discover what works, what doesn’t, and what credit unions should keep in mind.
Back to the workplace
Workplace lending has long been part of the credit union story. After all, most credit unions in the U.S. began as cooperatives serving select employee groups: members who all worked for the same agency or company, and that common bond inspired so much of the early growth of the industry.
Today, while most credit unions have transitioned to a community charter, the workplace can remain a great source of connection, service, and growth.
Employer-sponsored small-dollar loans are an important option for employees who are experiencing financial challenges, especially those with subprime or no credit who might otherwise be forced to turn to high-cost borrowing. ESSDLs might establish or increase credit standing along with regular savings, which in turn can be used for future financial emergencies. ESSDLs can also be an important part of employers’ financial wellness programs and can help employees gain access to the full array of financial products and services offered by credit unions.
Therefore, for employers, ESSDLs can serve as an employee benefit and a retention tool. For credit unions, they can be an easy-to-operate product that aligns with their mission to serve the community by offering safer, more affordable short-term credit options.
Opportunities for your credit union
The credit union leaders Filene interviewed described ESSDLs as “broadly beneficial at the borrower, credit union, employer, and community levels.” In addition, losses were minimal, largely because of consistent employment and automated payment from checking.
They described the loans as a “lifeline” to borrowers, giving affordable access to credit, a pathway out of predatory lending cycles, the chance to build savings, access to other member products and services, especially financial counseling, as well as basic banking offerings like checking, savings, and mobile banking, and perhaps most importantly, emotional relief.
For credit unions, additional benefits can accrue over time, including improved engagement with their own team members, a feeling of increased community involvement, new membership, and cross-sales opportunities.
Credit union leaders advised those interested in developing ESSDL programs to have a spirit of experimentation and prioritize active communication with their partners. “Financial institutions, no matter how creative they may be, are very structured and routinized,” one leader explained. “This is stepping into space that is harder for them to wrap their heads around and manage in a way, because it’s different. Different isn’t always bad and scary. It’s what you remain open to.”
Giving relief to borrowers
Finally, the impact of an employer-sponsored small-dollar loan on borrowers' lives was undeniable. When surveyed, many borrowers said they used the loan to help cover a lack of savings or large, unexpected, or seasonal expenses. Results also suggested that the loan was effective in reaching borrowers who otherwise may have struggled to access that credit elsewhere, as many borrowers tended to have lower credit scores.
Nearly half of ESSDL borrowers said the loan helped them reduce late fees and interest. Perhaps most interesting was that the majority of borrowers also indicated they would be interested in rolling over their loan payments to savings deposits at loan maturity. While this option is not currently offered on many ESSDLs, it points to a possible future pathway in which employer-sponsored small-dollar loans can help borrowers continue building their financial health while relieving acute financial stress.
Ultimately, ESSDLs appeared to be a net positive for credit unions, employers, and borrowers alike. Could an ESSDL relationship make sense for your credit union? Read the full report and learn more at filene.org.
