With never ending news about the credit crunch people are worrying about their finances more than ever. As traditional credit sources dry up one form of finance is finding popularity – employer loans. But should you be raiding your pension fund to pay off your debts?

According to the Society for Human Resource Management HR departments saw a 39% increase over the past year with workers seeking to do just that and cash in part of their 401k pension funds.

Alison in Florida was one of a growing number of workers who opted for a 401k loan. Facing over$10,000 in credit card bills she looked at consolidating her debts but also considered 401k loans, “My boss had done something similar, a fact she discussed with me one day over a working lunch, and it was because of her experience that I saw this as a way out of my financial mess.” After a chat with finance she decided to go ahead despite still having some doubts. “My biggest concern was that I would lose my job before I had paid off the 401K loan because if I was terminated or quit, the entire loan would have to be repaid in full immediately. For that reason, I did hold onto some of those credit card checks!”

However the experience turned out to be a beneficial one for Alison, “Borrowing against my own money, and having the money automatically deducted from my pay check was a painless way of getting out of debt. After the first month or two, I didn't even notice the reduction in my pay check and I was free of all credit card statements. I would recommend this to people who plan to stay with their employer for the foreseeable future.”

Sarah also turned to her boss when she wanted to put down a $40,000 down payment on her first home. She felt this limited her option to change jobs, “If I had wanted to change jobs before the loan was paid off, well, I'm not entirely sure. I can say that there were points when I was feeling fairly unhappy with my position and even sometimes felt that the loan was held over my head and felt my options were limited with the outstanding debt.”

But Sarah feels that life would have been different without the support from her employer, “If the loan wasn't available from my employer we would have had a substantially smaller down payment, had a harder time obtaining a loan and have been severly cash strapped for our first year in our new home. The extra money allowed us the freedom to buy a new washer, dryer and fridge. Our lives definitely would have been different and much harder without the help.”

Workplace loans either offered by employers or through 401k release schemes can offer significant benefits compared to traditional finance options. Interest rates tend to be considerably more favourable and they're often 'off-sheet' so aren't seen by credit checks. However, bundling your career and finances can cause problems.

Lisa found this out when she used an employer loan to buy a new home computer. “I hadn’t thought about the significance of this as at the time, $25 off my monthly pay check seemed like nothing. However when I became pregnant and was going on maternity leave and suddenly there was the email, “Will you be paying the full amount owing back before your leave?” from our finance department. I hadn’t thought about that and had to quickly revamp my whole budget, at a time when finances were going to get tough anyhow.” Lisa's employer had informed her that the entire loan would become due if she were to leave the company for any reason but had never mentioned that this included maternity leave.

As the economy tightens and credit becomes difficult to find workers are increasingly going to look at schemes their employers offer. But it's important to think what would happen if you need to change jobs or if the worst happens and you lose your job. Consider how you would fund the loan in those circumstances. Employer loans will have an attractive interest rate but need to be balanced against your career and job security.