According to the financial experts, I just made a huge mistake. In fact, if you ask them, I most likely ruined my ability to ever retire. I recently took out a loan from my 401k to do some debt consolidation, and contrary to what the so called experts say I’m not worried about the long term impact on my retirement account. There are actually very good reasons why borrowing from a 401k for debt consolidation is a good idea.
Easy To Be Approved
A credit check or approval process is typically not needed. When you take out a loan from your 401k, you’re essentially borrowing from yourself therefore being approved is basically a sure thing.
Sizeable Loan Amounts
With the lesser of half the 401k value or $50,000 available to borrow, a person can do a lot of debt consolidation with a 401k loan.
Interest Really Isn’t Interest
While 401k loans have an interest rate associated with them, the interest paid actually goes back into the plan holder’s account. This makes a 401k loan a perfect avenue for debt consolidation. Instead of paying interest to a credit card company, you pay interest yourself. The only fee actually paid with a 401K loan is possibly a loan origination fee.
Not on Credit Report
Because borrowing from your 401k isn’t a real loan (you’re essentially borrowing from yourself), it doesn’t show up on your credit report. Having a 401k loan will not affect your ability to secure additional credit for other purposes.
Long Term Impact May Be Overblown
Financial experts say 401k loans sabotage the long term growth of a person’s retirement account. They say that the funds that are removed from your 401k miss out on the growth that would occur. What is not usually mentioned is those funds see a growth rate equal to the loan interest rate since interest paid goes into your 401k account. While it is true that rapid stock market growth may exceed the interest rate of a 401k loan, the amount lost is usually not significant especially if you repay the loan quickly. In times where the stock market goes down, the growth experienced by a 401k by way of loan interest payments may actually shield a person form stock market losses.
Taking out a loan from your 401k for debt consolidation is not necessarily the bad idea that most experts would have you believe. While the goal should always be to prevent debt and/or to pay it off as possible, using a 401k loan for debt consolidation is worth a look.
How about your Clever Friends, have you ever taken out a loan from your 401k for debt consolidation?
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Brought to you courtesy of Brock