Finding yourself in tight financial circumstances you may be asking yourself “Should I pay off 401k loan or credit card debt first?” The answer will depend on the requirements your 401k has for repayments of loans.
What are 401k loan requirements?
When you take out a loan against your 401k you are essentially borrowing from yourself. While you are required to pay back your retirement account with interest, the main fact is that you are borrowing your own money. Because of this there are different rules attached to the loan. If you do not comply with the regulations set forth by your plan provider for the loan, that loan will convert into an early withdrawal and you will be hit with steep fines, high taxes and a 10% penalty for early withdrawal.
What should I do if I can’t pay back both debts?
If you have to choose between paying off your 401k loan and credit card debts you must consider which debt will cause you the biggest loss. Penalties and taxes may far outweigh the cost of credit card penalties for a late payment. Also, a thing to consider is debt help. Many companies can assist you in making repayment terms for your credit cards. This should help you decide if you should pay off your 401k loan or your credit card debt first.
Can I use a 401k loan to pay off credit card debt?
Yes you can and it is a smart idea if you can pay off as much credit card debt as possible. The interest you will be paying on a 401k loan will be considerably less than what you will be paying toward credit card debt.