Is Borrowing Against
Your 401k A Good Idea
With the economy in the
shape that it is currently in and with the fact that it is not looking to improve anytime soon many people are
looking for different ways to borrow money. One option for many people is to borrow against his or her
401k plans. This is a very tempting option because
You are essentially
borrowing money from yourself and paying yourself back. It might sound like the perfect solution when
you are in desperate need for some extra cash. As of right now the current rule for borrowing
from your 401k is that you are able to
borrow up to the amount of $50,000 or fifty percent of what is
currently in your 401k. Whichever amount is smaller is what you can borrow. The
article below will help to explain the pros and the cons of borrowing this money.
The Pros Of Borrowing Money
From Your 401k
There are many pros to
borrowing money from your 401k the top of these benefits is that you do not have to qualify for the loan and go
through the approval process. This is because the money that you are borrowing is already
yours. This makes the approval process much quicker.
A second benefit is that
the interest rate that is applied to the loan will be much lower than that of a traditional loan and the interest
that you are paying back goes directly into your account. Therefore by the time the loan will be paid
in full there will be more money in the account than there was in the beginning.
A third and very popular
benefit to the loan is the length of time you have to pay back the loan. Most often the length of time
is going to be five to ten years. This will give you plenty of money as well as plenty of time
to pay it back.
The Cons Of Borrowing Money
From Your 401k
As always with the pros to
something there is always the cons as well. The biggest of the disadvantages when it comes to
borrowing from your 401k is that it will slow down the growth of your retirement plan until the money is paid back
in full. Also because the loan is paid back through your payroll deduction the amount of money
you are taking home from your paycheck will be reduced greatly. This can cause a budget crunch
when it comes time to pay your monthly bills. But the biggest of the disadvantages is that if
you leave your job for any reason you will be required to pay back the entire amount of the loan within sixty
days. If you do not pay it back you will face tax penalties and they can add up quickly.
You should think long and
hard about borrowing money from your 401k. There are great advantages to having this as a possibility
but there are also major disadvantages to it as well such as not having enough money on payday or not being able to
pay the loan back in full. However if you
need access to money quickly it is the perfect solution.
See also: personal loans for
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