Should I borrow against my 401k at 6% interest rate (which I pay to myself) or take a loan through a bank at 3.5% interest rate (which is paid to the bank)? Buying a car for my kids and can't afford to pay outright so I need to borrow money from somewhere. My 401K right now has a return rate of 2.3% rate of return. I'd be borrowing 20k.
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1Don't want to mark it duplicate since apparently my single vote closes the question, but have you read this? money.stackexchange.com/questions/56793/… While the situation is slightly different, I think the answers will help you.– littleadvCommented Oct 20, 2022 at 0:18
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If you can afford to “pay yourself back”, then you should have been able to increase your contribution rate.– RonJohnCommented Oct 20, 2022 at 12:55
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1 Answer
Check to see if you will still be able to contribute to the 401(k), and if you will still get the match while you have the loan. If you can't contribute new funds and can't get the match, then the period you have the loans puts a hole into your savings. Missing years are hard to recover from.
An option is to reduce your contributions to an amount that gets you the maximum match, and nothing more. That keeps some of the contributions flowing, and doesn't skip the match.
All 401(k) loans come with the risk that if you lose your job, the accelerated due date will make a big impact on your cash just at the time you need to cut expenses. Even if the job change is voluntary, the old employer will accelerate the due date.
answered Oct 19, 2022 at 18:45
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Thank you for this. I can continue to contribute. There is no employer match because it I work for the government (local county) and my employer contributes to a pension plan. So, based on my ability to continue contributing while paying back the loan I've taken, what are your thoughts - borrow from 401k at 6% or finance through my bank at 3.5%?– TinaCommented Oct 19, 2022 at 18:58
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Personally I would borrow from my 401k but also find out if you lose your job is the money due right away? I was working for a company where I once had a loan and quit. The nice thing through our 401k was the money could be paid back using a payment plan I think it was 3-4 hundred a month. It worked out for me and instead of the bank getting interest I did. But like I said find that out first.– JonHCommented Oct 20, 2022 at 13:03
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1@JonH: I believe that a default on a 401k loan repayment due to leaving the job can be rolled over into an IRA any time before the tax return deadline. Commented Oct 20, 2022 at 16:35
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@user102008 all the better - i didnt know that and I didnt take that route when i left but that was many years ago. I just remember thinking how am I going to pay this loan back the day I quit. Then HR said hey fidelity has a plan where you can pay them back (i think it allowed for 2-3 years too) I setup the plan and paid off the loan earlier then expected. Also your plan may have fees associated with taking out a loan so just keep a running list of the pros and cons. I hate dealing with banks so I ended up with a loan from my 401k (which is also not a wise thing to do).– JonHCommented Oct 20, 2022 at 17:11