18 Pro And Cons Of 401k Loans

Pros: 1. No loan application necessary. 2. 401(k) Loans Have Competitive Interest Rates. 3. The loans incur no income tax or penalties for early withdrawal unless you default. 4. Help pay down high interest credit cards or other types of debt. 5. You're paying interest back to yourself. 7. Easy repayment: Quite often a 401k loan repayment comes directly out of your paycheck. That makes paying your loan back easy – it comes directly out of your paycheck so you never see the money and feel the pinch of losing it. 8. No minimum credit score required. 9. Most 401(k) loans come with interest rates cheaper than credit cards charge. 10. Funds are acquired quickly and easily. 11. You can borrow for almost any reason. Cons: You'll pay double taxation on the interest component. By borrowing it out, you now have to earn the money, pay taxes on it, then put the money plus interest back into the plan. When you withdraw it later, you'll pay income tax on it again. This defeats the purpose of having a tax-deferred account. 2. To borrow money, you remove it from investment in the market, forfeiting potential gains.Calculate your potential losses carefully. 3. It is dependent upon your employment. You are paying back the loan via payroll, if you no longer work for the employer, chances are your loan will go into default. This means you are incurring taxes and penalties on the existing loan balance. 4. Fees: If you're not careful you could be losing quite a bit of money to fees. There can be loan origination fees, and in some cases annual maintenance fee.