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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 bad credit nc and  personal loans for bad credit in pa