A lot of people nowadays have heard about 401k loans and are thinking of applying for this financing product. But, if you’re one of these folks, are you sure that this is the right step to take? If you’re not 100 percent certain, read the following lists and find out if this option best fits your needs.
List of Pros of 401k Loans
1. It gives you immediate access to the amount you need.
401k loans usually don’t need a credit check and don’t have a long and complicated application process. The money from the loan also gets released within a relatively short amount of time. This is great if your credit scores aren’t exactly perfect and you find it hard to borrow from lenders, or if you need to have a certain amount of money ASAP to buy groceries, cover your rent and pay unexpected bills.
2. It is relatively cheap compared to other options.
Unlike credit cards and other types of loans, 401k loans have cheap interest rates. As a result, you won’t have to deal with large monthly repayments that can threaten to destroy your budget. And here’s the best part: since you’re borrowing from your retirement funds, you’re actually paying the interest to yourself and not to some bank or credit card company.
3. It can help develop your wealth.
You can use the money from your 401k loan to start a business, purchase buy-to-rent properties or invest in stocks and shares. You can also use it to fund your education and, in turn, expand your employment and income opportunities. By taking these steps, you’ll get to increase your earnings and have enough cash to repay your loan and inject more money into your nest egg.
List of Cons of 401k Loans
1. It prevents your retirement funds from growing.
When you take money out of your retirement funds, that certain amount is no longer invested in stocks, shares, and other vehicles. As a result, it stops earning compound interests and is no longer tax-deferred. Of course, since most of your extra cash will go to repaying your loan, you’ll contribute less to your retirement funds. All of these mean that you’ll miss certain earning opportunities and your nest egg will grow more slowly than if you had left it alone.
2. It can expose you to financial troubles.
Taking out a 401k loan can be beneficial — as long as you have job security and are sure that you won’t get laid off in the next few years. This comes from the fact that, when you lose your job, your loan will become due within the next 60 days. It will also be tagged as an early withdrawal, which means you’ll now be charged with a 10 percent penalty and required to pay income taxes on your loan amount.
Even if you won’t lose your job, taking out a 401k loan can still put a strain on your finances since your monthly repayments will be taken out of your paycheck. So, before you submit your loan application, you first have to analyze your budget and ensure you can live with a lower take-home pay.