Should You Borrow From Your 401k?

Financing

Should You Borrow From Your 401k?

Pros:

  • A 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%.
  • 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.