Payroll Loan is the amount of loan that creditor gives to borrower base on their employment status and salary. This loan usually has a high-interest rate as the creditors do not require any colleterial. It is based only on the borrowers’ salaries.
The creditors usually provide the maximum amount of loan by the number of borrowers’ salary, it can be 10 or 12 months salary depend on the amount of risk they are willing to face. So the loan size is not so big which allows a very quick process. It is easier to obtain this kind of loan as the creditor does not spend time on evaluating the colleterial. In some countries, the loan is approved and disbursed on the same day we request.
The creditor will collect the money back base on the borrower’s salary. They usually take only 40% to 60% of the monthly salary otherwise the borrower will not be able to pay.
Payroll Loan Example
Mr. A decides to request a payroll loan from Company ABC. Base on the policy, company can provide a loan below 25 months of borrower salary. They do not require any colleterial and the interest rate is between 8% – 15% annually. Mr. A has a salary of $ 5,000 and requests a $ 50,000 loan so it is within the company threshold.
After the company verifies the document, the loan can be disbursed within 24h.
Payroll Loan Journal Entry
The company make journal entry by debiting loan to customer and crediting cash disbursement.
|Loan to customer
This type of loan helps the borrower to receive quick cash for emergency usage. They do not need to wait for a long process which requires by the bank or other creditor. However, the downside is they have to pay a high interest rate compare to normal loans.