The Pros and Cons of 401k Loans
 
The Pros and Cons of 401k Loans

If you need money and cannot get a loan, due to poor credit, you may consider dipping into your 401k. Many companies allow their employees to borrow from their 401k plans. If you have this option, you may consider taking it. However, is it the best idea? Like most financial choices, 401k loans have their pros and cons. What are they?

The Pros of 401k Loans

No credit check is required. In a way, this is your money. Right now, your company is in control of it. Since the money will eventually become yours, most employers do not have a problem dispensing loans. In fact, they do so without credit checks. Not paying back a 401k loan has many consequences. Due to that fact and the damaging financial impact, most employers know their employees will make good on repayment. That is why a loan is usually offered and without a credit check. If you need money in pinch and have poor credit, borrowing from your 401k may be your only option.

Low interest rates, which you eventually recoup. As previously stated, the money in a 401k plan is yours. Your company is just in charge of managing the funds. For that reason, you are paying interest on your own loan. Not only are you charged low interest rates, unlike the inflated rates for payday loans, you get the money back!

You know what to expect. Your company has as much interest in your 401k as you do. They want to ensure you use the money and properly. For that reason, a company representative will do more than just hand you a check. They will work with you to ensure you understand the process. There should be no surprises. You know exactly how much money you borrowed, how much you need to repay, by when, and the consequences for missing payments. With the recent concern of adjustable rate mortgages, which left many mortgage borrowers surprised and in foreclosure, this should be welcoming news.

The Cons of 401k Loans

Double taxation. 401k plans are tax deferred. Any contributions to your account through payroll deductions reduce your taxable income. For example, if you earn $50,000, but contribute $2,000 to your 401k, your taxable income from the year is $48,000. Unfortunately, that money is taxed when withdrawn. Since you are required to pay that money back, you are taxed again. Why the tax? You are repaying a loan, not technically contributing to your retirement savings.

Many rules and restrictions. For starters, not all employers enable their employees to take a 401k loan. If it is allowed, an application is required. This application is shorter than most bank-approved loans, but approval is not guaranteed. For the most part, businesses prefer to do short-term loans. These loans are typically repaid within 5 years. Car repairs or medical bills are considered short-term loans. Long-term loans, small to medium sized companies tend to stay away from. These expensive loans take much longer to payoff, like home loans.

You can lose money. When working to repay a 401k loan, most employees stop contributing to their fund. Remember, you are repaying the loan not adding more to your account. Although the money is entering back into your retirement fund, it falls into a separate category. If you can, continue to make regular contributions. If you cannot, you miss out of free money from employer contributions.

Fees. You may be charged a fee for requesting a 401k loan. If this fee exists, your employer will determine its cost. On average, it is $50. This fee covers the cost of overseeing of the loan.

As you can see, there are a number of pros and cons to borrowing against your 401k. So, what should you do? If in dire need of money, opt for a loan. Never borrow more than you need, use as a last resort, try to continue with regular contributions, and repay in a timely matter.

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Articles
401k Cash Outs versus 401k Loans

401k: Don't Put All Your Eggs in One Basket

401k Early Withdrawals: Are They Worth it?

401k Investments: Should You Choose or Let a Professional?

401K Investments: Wait or Make the Change?

401k Plans and Stocks: The Importance of Diversification

401k Stocks: Should You Pull Out Because of the Bad Economy

401k Stocks: Using the Internet as a Research Tool

401k: Where to Invest Your Money

Changing Jobs: What to Do With Your 401K

Don't Have a 401k: Get One Now

Dos and Don'ts of 401k Investing

How and Why to Monitor Your 401k

How to Diversify Stocks in Your 401k

How to Enroll in a 401k Program

Questions to Ask About 401Ks

Should You Take a 401k Loan?

The Pros and Cons of 401k Loans

Tips for Doing 401k Rollovers

Tips for Waiting Out the Poor Stock Market

Tips to Avoid Tapping Into Your 401k

Tips to Invest Your 401k

Why You Should Invest in the Stock Market Now

Why Your 401K is Important

Your 401k and Early Retirement

 

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This site is a common sense guide to The Pros and Cons of 401k Loans. In practical advice websites, like anything else in life, there are no guarantees of income made. Readers are cautioned to reply on their own judgment about their individual circumstances to act accordingly.

This site is not intended for use as a source of legal, business, accounting or financial advice. All readers are advised to seek services of competent professionals in legal, business, accounting, and finance field.

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