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401k Loans - The Pros and Cons

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  • 401k Loans - The Pros and Cons

    In a pinch and really need cash? If you have been paying in to a 401k account through your employer and have over one thousand dollars contributed and vested, you qualify for 401k loans. These loans are meant to help you out of a financial hardship. Whether it is tuition that needs paid, your car broke down or you need to catch up on mortgage payments, a loan of this type can be just what you need when you can not get money any other way.

    Just like any loan, there are pros and cons. 401k loans are far different from most standard loans in because in this case, you are borrowing from yourself. When you pay money in to a 401k, you are putting it aside for your future - for retirement. To take your retirement money out and not replace it is highly irresponsible so the government has intervened and made sure you put it back.

    You may borrow half of the amount you have vested in your account up to fifty thousand dollars. This can be a huge help for those about to lose their homes or faced with other financial emergencies. You must remember, though - this loan will have to be repaid. You have no say in when or how much you are paying back per payment for the most part. You will be getting payroll deductions to pay the borrowed amount back and you will be paying interest as well.

    Be sure you can afford to live on the lowered amount of your upcoming paychecks until your loan is paid off. Depending on how much you borrow from your account, 401k loans payback schedule is up to five years. Budget wisely so you do not get in a bind again.

    The interest you pay back on it is automatically rolled back into the account so it is actually a win-win situation. You will not have to deal with the hassles of standard loans through lending institutions like credit checks or your payments being posted to your credit rating. These days, most people relish this idea.

    One big thing to consider before making the jump and taking your 401k loan - if for any reason your employment with the company ends, you will have one of two things staring you in the face - you will have to pay the loan back in full right away or you will end up getting taxed on all money that you borrowed. This is a pretty big deal so think about it before you take the money.

    401k loans are helping people everywhere in these hard financial times. Remember that you are borrowing from your future so do so responsibly.

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