Should You Borrow From Your 401k?
Pros:
1) A low interest (3%-4%) 401(k) loan does not appear on your credit report.
2) You’re paying yourself the interest, not some bank. So as you pay down the loan, the interest portion of the payment is being added to your retirement fund.
3) You’ will receive your loan proceeds more quickly than a home equity loan, without the hassle of underwriting.
4) Since it’s a loan, you will not be charged the 10 percent early withdrawal penalties plus income taxes you would have to pay if you withdrew the money.
5) You don’t have to qualify for the loan because in effect, you are the lender.
6) No assets or collateral are needed to secure the loan.
Cons:
1) You are forfeiting the accrued interest you would earn if your money stayed in the 401(k). In a market downturn this can be a positive.
2) The interest is not tax deductible. But on a small loan, how much are you really saving with the tax deduction?
3) Some plans do not allow contributions to the 401(k) for the period of the loan.
4) If you lose or quit your job, the loan is often due in full in 30-60 days (although some plans are open to renegotiating the terms of the loan. Find out before you sign the papers.)
5) If you default on the loan, it is considered a withdrawal and you will owe a 10 percent penalty plus a hefty tax payment.