How Will A 401K Loan Affect Credit?
The ins and outs of a 401K loan.
Is it legal to take a 401k plan loan?
Yes, it is, but an employer is not required to allow you to do so. Sometimes smaller business cannot afford the costs involved.
Reasons loans are taken out.
There are no statutes governing what the loan can be used for. The only “rule” a company must follow is that it must be reasonably available to all participants. Employers themselves can restrict the reasons for loans though.
The most common reasons are to pay college costs, medical expenses, buy a primary home or to make payment necessary to stop from being evicted or defaulting on a mortgage.
Are there any benefits to taking out a 401k loan?
They are convenient, there is no credit check, some plans only require a phone call, and others might have a form to fill out. The interest rates on them are low. It is usually one or two percentage points above the prime rate. You are paying the interest to yourself also, not to the bank or credit card company. You do not have to pay interest on the amount until retirement when you take your monetary investment out of the plan. You can also choose which investment option to sell so that you can leave the other money untouched in investments that perform better.
Are there any reasons I should not take a loan out against my 401K?
Sometimes there are “opportunity costs”. The interest rate paid on a plan loan is less that the rate the plan would have otherwise earned. Because you now have a loan payment, you may also be tempted to reduce the amount you are contributing to the plan and this reduces your long-range account balance. Loan defaults can hurt you. If you quit working for or change employers, the loan has to be paid back immediately. If you cannot do this it is considered defaulted and you will be taxed on he outstanding balance and any early withdrawal penalties if you are not 59 1/2 years old. There may also be fees involved, the interest on he loan isn’t tax deductible (even if used to purchase primary home) and you have no flexibility in changing the payment terms of your loan.
You should definitely not take out such a loan if you plan to leave your job anytime within the next couple of years, you are nearing retirement, or you cannot obtain money from other sources. You also should not consider if you cannot make regular contributions to the plan, you cannot pay it off if you get laid off or change jobs, you need the loan for everyday living expenses or you want the money to pay for luxury items like vacations.
The best thing about taking out a 401K loan is that it is not reported to any credit bureaus. It does not affect your credit rating (FICO score) in any way. Even if you default on a 401K loan, it is not reflected negatively on your credit report.
Related posts
- Should I Payoff A 401K Loan Or Credit Card Debt First?
- How Do 401K Loans Work?
- Can I Borrow Money From My 401K?
- How Do I Request A Hardship Loan Against My 401K?
- Should I use My 401K To Pay Off My Mortgage?
3 Responses to “How Will A 401K Loan Affect Credit?”
Leave a Reply
Send this page to a friend ...
Make moeny at home
Great post, i need this issue, you explain very clearly
Hello, i think that i saw you visited my web site thus i came to “return the favor”.I am attempting to find things to enhance my site!I suppose its ok to use some of your ideas!!