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Should You Take Out A 401k Loan?

401k loan

The High Cost of a 401k Loan –

If you are a hard working person that has an emergency, new business venture, or a large purchase that you desire, you may be thinking about borrowing from your 401k plan. Generally, people can borrow money from their 401k plans after a certain amount of time if they have the minimum amount of money in the account that is necessary to take out a loan.

The time may be one year from when the person opens the account, and the amount may be several thousand dollars. Employees should request that information from their employers as soon as possible. Each person should weigh the pros and the cons before deciding whether or not to take out a 401k loan.

When times are tough and money is tight, it may be tempting to dip into your 401k to take out a loan to get you through a rough patch and back on your feet again. Taking out a 401k loan may sound like a viable option; after all, the money is yours, right? However, there are several things you may want to consider before taking out the loan.

The Benefits of Taking a 401k Loan –

Many benefits exist for taking out a 401k loan, which is why many people decide to take such loans shortly after they become eligible to do so. One of the benefits of taking this type of loan is that there is no lengthy application process. Traditional loans can take up to two or four weeks before the applicant even receives an approval or denial on the request. A 401k loan can be processed within days.

Another benefit of a 401k advance is that the interest rates are much better than those of traditional personal loans. Also, a 401k loan is not one that requires a credit check to receive because the money is yours. Therefore, all borrowers should get approval for the funds that they need in a short amount of time. You should have no problem hearing a positive answer from the lender.

The Disadvantages of Taking a 401k Loan –

The 401k loan idea does have some disadvantages to it. The first disadvantage is that there are some restrictions when it comes to repayment time. You will have to repay the advance rather quickly if you use the funds to buy something like a car.

Secondly, you lose some of the money that goes towards your requirement when you borrow from the 401k. Furthermore, you end up having to pay back more than you borrowed, but a certain level of that happens with regular cash advances, as well. The decision of whether or not to take this type of loan must be yours and yours alone. If you can find some other means to get the funds that would probably be the best solution.

How to Get a 401k Loan –

To request a 401k loan, you will have to log into your 401k client account online. You will have to state the reason for the request. The companies are usually fair about situations such as eviction prevention, medical needs, vehicle or home purchase, and educational expenses. The educational expenses are monies that you would have to pay so that your children can go to college. The menu option should be available so that you can ask for the loan if you qualify for it. If you are approved, you will receive your check in the mail. You can then do whatever you please with the funds. If you are not comfortable with applying online, you can always give the company a call and ask about how to request a loan from your 401k.

The Slippery Slope –

Though you may have every intention of paying the money back into your fund, depending on the circumstances, your loan could very easily turn into a withdrawal. For instance, if you lose your job, you may be required to repay your loan quickly, in which case what you originally intended to be a loan will become a withdrawal. Once your loan becomes a withdrawal, you will have to pay both taxes and penalty fees on the balance you owe and it doesn’t stop there. Approximately every one thousand dollars withdrawn for people in their 30s will cost around ten thousand dollars in lost future income. For people in their 20s, the number is even more staggering at 20 thousand dollars lost because you are not contributing to the investment anymore.

Even if your loan does not become a withdrawal, it could stand in the way of future contributions. Whether you voluntarily stop because you can’t afford to make contributions while you repay your loan, or whether your plan has prohibited you from making contributions, it will cost you. Once you stop contributing during your loan period, you can lose anywhere from ten to twenty percent of your future retirement fund. If you are able to continue making contributions, you will likely be contributing less than if you hadn’t taken out the loan.

Consider All of Your Options –

Before taking out a 401k loan, ask yourself if it’s really necessary. Is the loan for an emergency or is it for a vacation or other luxury? Is there a bigger financial problem at hand that you should be focusing on? If so, consider cutting unnecessary expenses first before taking out the loan. Can you keep up with your monthly contributions if you take out the loan? If not, you may want to reconsider and find a different option.

If you are struggling financially, a 401k loan is not your only option. The professionals at Advantage CCS can help evaluate your financial situation and offer a variety of options and services to get your finances in order and back on your feet while making sure your financial future remains secure. We can work with your creditors to help you make manageable payments based on your current income and budgeting situation. We can work out a debt management plan and help you learn to stick to a budget. Don’t potentially damage your future savings, try contacting Advantage CCS first.


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