Borrowing money against your 401k

There are time when you just need a loan. Maybe you have a car break down, or you get hurt and can't work for a time, or you have a baby or some other unexpected expense. These are not the most ideal times, but the truth is they happen to everyone. So, when they happen you can go out and try for a traditional loan, or you can consider borrowing money from yourself. How? Well, you can borrow money against your 401k.

Let's look at some of the reasons to consider borrowing money against your 401k:

  • Decent rates. Most 401k loans are at prime plus one. This is a far better rate then the 18-20 percent a credit card advance will give you, and in many times, especially if you have a large need it is far better than a traditional signature loan will give you. And, this does not even take into consideration what kind of rates a payday loan company might offer.
  • You do not have to secure these loans. No extra collateral is necessary for a 401k loan. In most cases, with other loans, you often have to put up assets to secure the loan, such as your house or car, etc. Most of the time this is not a problem, but if things are really tight, you may not want to put your home on the line for the loan. However, with a 401k loan, the collateral, which is your plan balance already belongs to you.
  • The terms are flexible. Many plans let you take loans for up to five years, and if you are borrowing from your 401k to get a home, it could even be up to 15 years. So, you have a lot of leeway for repayment.
  • No hassles. Compared with other loans, getting a 401(k) loan is simple and there is a lot less paperwork. The reason is you do not have to meet lender qualifications, or try and show your good credit, you already own the money, so it is just a matter of setting the terms of the loan.

OK, so now you know the plus side of borrowing money against your 401k. But as we all know too well, with every positive there is a negative. Let's take a look at some of the negatives of borrowing money against your 401k.

  • If you can't pay back your loan, you'll be treated as though you'd withdrawn the money from your 401(k) -- with all the taxes and penalties that apply.
  • If you lose your job or decide to switch jobs, you have to pay back your loan right away.
  • As long as your loan is outstanding, you'll miss out on the returns you would've earned if you'd been invested in stocks.

A 401k loan is really only a good loan for you to consider if you are in a crunch, not to buy a boat, or finance your child's prom excursion. A 401k is better than putting your house on the line for something, but it is really only a good idea to borrow against it if you have a plan for paying yourself back. So, the verdict is, if you're facing a temporary setback and need a short-term solution, a 401(k) loan may not be as bad as some experts think -- and a lot better than your alternatives. However, as always, when getting a loan, consider your options carefully.

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