Should You Borrow From Your 401k?

Real Estate

Should You Borrow From Your 401k?

Pros:

401(k) loan does not appear on your credit report.

The interest on these loans is some of the lowest out there—right now, 3-4 percent.

You’re paying yourself the interest, not some bank.

You’ll get your money more quickly than a home equity loan.

Since it’s a loan, you will not be charged the 10 percent early withdrawal penalties plus income taxes you would have to pay if you withdrew the money.

You don’t have to qualify for the loan because in effect, you are the lender.

No assets or collateral are needed to secure the loan.

Cons:

You are forfeiting the accrued interest you would earn if your money stayed in the 401(k).

The interest is not tax deductible.

Some plans do not allow contributions to the 401(k) for the period of the loan.

If you lose or quit your job, the loan is often due in full in 30-60 days (although some plans are open to renegotiating the terms of the loan. Find out before you sign the papers.)

If you default on the loan, it is considered a withdrawal and you will owe a 10 percent penalty plus a hefty tax payment.