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What is an 401(k) loan? Is it a good idea?
Advertiser disclosure You're our first priority. Each time. We believe that every person should be able to make financial decisions with confidence. And while our site does not include every company or financial product available in the marketplace however, we're confident of the advice we offer as well as the advice we provide and the tools we create are objective, independent simple, and completely free. How do we earn money? Our partners compensate us. This may influence which products we write about (and where those products appear on the site), but it doesn't affect our suggestions or recommendations that are based on many hours of study. Our partners cannot promise us favorable reviews of their products or services. .
What is an 401(k) Loan and Is It a Good Idea?
A 401(k) loan can derail your retirement savings. Weigh the risks and consider alternatives to financing.
Updated on January 31st, 2023
The majority or all of the products featured here are from our partners, who pay us. This influences which products we write about and the location and manner in which the product is displayed on a page. But this doesn't influence our evaluations. Our views are our own. Here's a list and .
Nerdy takeaways
The standard 401(k) plan allows you to borrow up to 50% of your account balance for up to five years with a maximum of $50,000. The cost to borrow is low and the interest will be returned to the lender. While the money is borrowed, you miss out on potential gains on stocks and the compounding interest which increases the savings you have in retirement. The 401(k) loan is best looked at after all other options have been exhausted.
A lot of 401(k) plans permit participants to take out loans against their retirement savings. It's a relatively affordable loan option that can help cover a large expense, but tread lightly. Getting a 401(k) loan can mean the loss of your retirement savings or penalties if you're not able repay the loan.
What is what is a 401(k) loan?
Employer rules vary, but 401(k) plans typically allow users to borrow as much as half of their retirement account balance , or $50,000, whichever is less -- for a maximum of five years.
After other borrowing options are ruled out and you're not sure what to do, it's possible to take out a 401(k) loan might be an option for paying off high-interest debt or to cover the cost of a necessity, but you'll need a disciplined financial plan to repay it on time and stay clear of penalties.
Pros and pros of a 401(k) loan
Be aware of these pros and cons prior borrowing.
Pros
401(k) loans usually have only one-digit rates of interest, which makes them less expensive than credit cards. In general, interest is equal to percent.
The interest you pay goes back into your own account.
There's not a credit check, and there's no any impact on your credit score.
Cons
It derails pension savings often dramatically.
If you decide to quit your job, you have to pay back the loan promptly.
Risks include tax consequences and penalties.
The real value of a 401(k) loan
The money you take out of your retirement savings account will not benefit from market gains and the magic of compound interest.
According to the report, borrowing $10,000 from the 401(k) plan for five years means forgoing an investment return of $1,989 and ending the five-year period with a balance of less than $666. It is assumed that you pay 5% of the interest on the loan and the investments that are part of this plan could have produced an average of 7%.
But the cost to your retirement account doesn't stop there. If you've got 30 more years left until retirement, the unpaid $666 could have increased to $5,406, according to NerdWallet's (assuming the same returns of 7% and compounding monthly).
In addition, you could reduce your 401(k) contributions when you make payments on an loan from the plan. This will further decrease the savings you have made in retirement.
401(k) loans are tied to the company you work for.
If you leave your job while repaying your 401(k) loan, you must repay the loan immediately or within a shortened time frame. Certain programs require you to pay the loan immediately if you quit prior to when the loan is paid.
If you are unable to pay back the loan, you'll be unable to repay the loan. IRS would consider any amount not paid as a distribution and consider it the income you report on the year's taxes. Additionally, you'll be charged 10% penalty for early withdrawal if you're younger than 59 1/2.
Should you use a 401(k) loan to pay off the debt?
Before taking out a 401(k) loan to pay off debt, consider alternatives that won't affect the savings you have in retirement.
>> MORE:
Debt consolidation: lets you roll several high-interest loans onto a balance transfer credit card, or personal loan with lower interest. You then have a single monthly debt payment and less the total cost of interest.
Options for debt relief: If you can't pay off your debts that are not secured including credit cards, personal loans and medical expenses -in five years' time or if your total debt exceeds half your income it could be necessary to consolidate. Your best option is to talk with an attorney or a credit counselor regarding credit counseling, which includes credit counseling.
Chapter 13 bankruptcy: Chapter 13 bankruptcy and debt management plans are required for five years of repayment at the most. Then, the remaining consumer debt will be wiped out. Chapter 7 bankruptcy discharges consumer debt immediately.
Contrary to consumer debt unlike consumer debt, a 401(k) loan isn't forgiven in bankruptcy.
>> MORE:
401(k) loan alternatives
Because of the risks associated the risk of 401(k) loans, first think about other options for financing.
Alternatives for large expenses
Personal loans They can be used them for just about anything, including debt consolidation, home repairs or emergencies, medical bills and medical expenses. The amount of loans ranges from $1,000 to $100,000, and the rates are 6% to 36 percent. The loans are usually paid in monthly installments, over a period between two and seven years.
These loans are unsecured, so there is no collateral requirement. The lender will use the information from your credit and financial records to determine whether you qualify as well as your interest rate per year.
>> MORE:
See if you pre-qualify for an individual loan and it will not affect your credit score
Just answer a few questions to receive customized rate estimates from several lenders.
The amount of the loan
on NerdWallet
The home equity loans and credit lines A house equity loan or line of credit is a low-interest way to pay for home repairs and other emergency. If you decide to take one of these it is possible to borrow the maximum amount of 80% your home's value, minus what you owe on the mortgage. The rates are usually within the single digits, and repayment terms are between 10 and 20 years.
Both home equity loans and credit lines will require you to pledge your home as collateral to secure the loan and the lender is able to take it if you do not pay. The biggest difference between these types of financing is the borrow-and-repay structure.
>> MORE:
0% APR balance transfer credit card choice is to move high-interest debt to a with an interest-free promotional period. You typically need to have excellent credit to be eligible (690 or higher credit score), and the amount you are able to transfer will depend upon the limit your credit card company offers you. If you qualify then you have to pay the balance during the period of interest-free promotion -typically 15 to 21 months -- in order to avoid paying the card's (often high) APR on a regular basis.
>> MORE:
Alternatives to pay for the smallest of costs
You can ask an amiable friend or family member to take out an loan to help fill in a gap in your income or pay for an emergency. There's no credit check with this option and you can draw up a contract with the lender outlining interest rates and how the loan will be repaid.
Cash advance applications permit users to borrow up to a few hundred dollars and repay it when they next pay. They are a quick option to pay for a emergency cost. There's no interest. However, these apps usually add charges for quick funding and request tips for optional use.
: If you're repairing a car or replacing a laptop, or buying a new mattress, the merchant may offer buy now, pay later plans. This payment plan lets you divide a purchase into smaller, generally biweekly payments. A bad credit score (a score lower than 630) isn't necessarily a barrier from qualifying because there's usually only a soft credit check.
>> MORE:
About the author: Annie Millerbernd is a personal loans writer. Her writing has been featured in The Associated Press and USA Today.
Similar to...
You can even go deeper into Personal Loans
Learn more about smart money strategies delivered straight to your inbox
Sign up and we'll send you Nerdy articles about the topics in finance which matter to you the most as well as other strategies to help you get more value from your money.
If you liked this write-up and you would like to get even more info concerning 255.00 payday loans online kindly see our page.
Advertiser disclosure You're our first priority. Each time. We believe that every person should be able to make financial decisions with confidence. And while our site does not include every company or financial product available in the marketplace however, we're confident of the advice we offer as well as the advice we provide and the tools we create are objective, independent simple, and completely free. How do we earn money? Our partners compensate us. This may influence which products we write about (and where those products appear on the site), but it doesn't affect our suggestions or recommendations that are based on many hours of study. Our partners cannot promise us favorable reviews of their products or services. .
What is an 401(k) Loan and Is It a Good Idea?
A 401(k) loan can derail your retirement savings. Weigh the risks and consider alternatives to financing.
Updated on January 31st, 2023
The majority or all of the products featured here are from our partners, who pay us. This influences which products we write about and the location and manner in which the product is displayed on a page. But this doesn't influence our evaluations. Our views are our own. Here's a list and .
Nerdy takeaways
The standard 401(k) plan allows you to borrow up to 50% of your account balance for up to five years with a maximum of $50,000. The cost to borrow is low and the interest will be returned to the lender. While the money is borrowed, you miss out on potential gains on stocks and the compounding interest which increases the savings you have in retirement. The 401(k) loan is best looked at after all other options have been exhausted.
A lot of 401(k) plans permit participants to take out loans against their retirement savings. It's a relatively affordable loan option that can help cover a large expense, but tread lightly. Getting a 401(k) loan can mean the loss of your retirement savings or penalties if you're not able repay the loan.
What is what is a 401(k) loan?
Employer rules vary, but 401(k) plans typically allow users to borrow as much as half of their retirement account balance , or $50,000, whichever is less -- for a maximum of five years.
After other borrowing options are ruled out and you're not sure what to do, it's possible to take out a 401(k) loan might be an option for paying off high-interest debt or to cover the cost of a necessity, but you'll need a disciplined financial plan to repay it on time and stay clear of penalties.
Pros and pros of a 401(k) loan
Be aware of these pros and cons prior borrowing.
Pros
401(k) loans usually have only one-digit rates of interest, which makes them less expensive than credit cards. In general, interest is equal to percent.
The interest you pay goes back into your own account.
There's not a credit check, and there's no any impact on your credit score.
Cons
It derails pension savings often dramatically.
If you decide to quit your job, you have to pay back the loan promptly.
Risks include tax consequences and penalties.
The real value of a 401(k) loan
The money you take out of your retirement savings account will not benefit from market gains and the magic of compound interest.
According to the report, borrowing $10,000 from the 401(k) plan for five years means forgoing an investment return of $1,989 and ending the five-year period with a balance of less than $666. It is assumed that you pay 5% of the interest on the loan and the investments that are part of this plan could have produced an average of 7%.
But the cost to your retirement account doesn't stop there. If you've got 30 more years left until retirement, the unpaid $666 could have increased to $5,406, according to NerdWallet's (assuming the same returns of 7% and compounding monthly).
In addition, you could reduce your 401(k) contributions when you make payments on an loan from the plan. This will further decrease the savings you have made in retirement.
401(k) loans are tied to the company you work for.
If you leave your job while repaying your 401(k) loan, you must repay the loan immediately or within a shortened time frame. Certain programs require you to pay the loan immediately if you quit prior to when the loan is paid.
If you are unable to pay back the loan, you'll be unable to repay the loan. IRS would consider any amount not paid as a distribution and consider it the income you report on the year's taxes. Additionally, you'll be charged 10% penalty for early withdrawal if you're younger than 59 1/2.
Should you use a 401(k) loan to pay off the debt?
Before taking out a 401(k) loan to pay off debt, consider alternatives that won't affect the savings you have in retirement.
>> MORE:
Debt consolidation: lets you roll several high-interest loans onto a balance transfer credit card, or personal loan with lower interest. You then have a single monthly debt payment and less the total cost of interest.
Options for debt relief: If you can't pay off your debts that are not secured including credit cards, personal loans and medical expenses -in five years' time or if your total debt exceeds half your income it could be necessary to consolidate. Your best option is to talk with an attorney or a credit counselor regarding credit counseling, which includes credit counseling.
Chapter 13 bankruptcy: Chapter 13 bankruptcy and debt management plans are required for five years of repayment at the most. Then, the remaining consumer debt will be wiped out. Chapter 7 bankruptcy discharges consumer debt immediately.
Contrary to consumer debt unlike consumer debt, a 401(k) loan isn't forgiven in bankruptcy.
>> MORE:
401(k) loan alternatives
Because of the risks associated the risk of 401(k) loans, first think about other options for financing.
Alternatives for large expenses
Personal loans They can be used them for just about anything, including debt consolidation, home repairs or emergencies, medical bills and medical expenses. The amount of loans ranges from $1,000 to $100,000, and the rates are 6% to 36 percent. The loans are usually paid in monthly installments, over a period between two and seven years.
These loans are unsecured, so there is no collateral requirement. The lender will use the information from your credit and financial records to determine whether you qualify as well as your interest rate per year.
>> MORE:
See if you pre-qualify for an individual loan and it will not affect your credit score
Just answer a few questions to receive customized rate estimates from several lenders.
The amount of the loan
on NerdWallet
The home equity loans and credit lines A house equity loan or line of credit is a low-interest way to pay for home repairs and other emergency. If you decide to take one of these it is possible to borrow the maximum amount of 80% your home's value, minus what you owe on the mortgage. The rates are usually within the single digits, and repayment terms are between 10 and 20 years.
Both home equity loans and credit lines will require you to pledge your home as collateral to secure the loan and the lender is able to take it if you do not pay. The biggest difference between these types of financing is the borrow-and-repay structure.
>> MORE:
0% APR balance transfer credit card choice is to move high-interest debt to a with an interest-free promotional period. You typically need to have excellent credit to be eligible (690 or higher credit score), and the amount you are able to transfer will depend upon the limit your credit card company offers you. If you qualify then you have to pay the balance during the period of interest-free promotion -typically 15 to 21 months -- in order to avoid paying the card's (often high) APR on a regular basis.
>> MORE:
Alternatives to pay for the smallest of costs
You can ask an amiable friend or family member to take out an loan to help fill in a gap in your income or pay for an emergency. There's no credit check with this option and you can draw up a contract with the lender outlining interest rates and how the loan will be repaid.
Cash advance applications permit users to borrow up to a few hundred dollars and repay it when they next pay. They are a quick option to pay for a emergency cost. There's no interest. However, these apps usually add charges for quick funding and request tips for optional use.
: If you're repairing a car or replacing a laptop, or buying a new mattress, the merchant may offer buy now, pay later plans. This payment plan lets you divide a purchase into smaller, generally biweekly payments. A bad credit score (a score lower than 630) isn't necessarily a barrier from qualifying because there's usually only a soft credit check.
>> MORE:
About the author: Annie Millerbernd is a personal loans writer. Her writing has been featured in The Associated Press and USA Today.
Similar to...
You can even go deeper into Personal Loans
Learn more about smart money strategies delivered straight to your inbox
Sign up and we'll send you Nerdy articles about the topics in finance which matter to you the most as well as other strategies to help you get more value from your money.
If you liked this write-up and you would like to get even more info concerning 255.00 payday loans online kindly see our page.
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