Comments on: 7 Reasons Why Borrowing From Your 401k is Bad, Bad, Bad!

By: Jim A.

Jim A. — Thu, 10 Jul 2008 15:06:51 +0000

I will just say that it worked out really well for me. I borrowed against my 401(k) for a downpayment on a house in 1999. I paid it off in full in 2003 when I refinanced into a 15 year fixed. So the earnings that I gave up were negative. The rate (4.875%) was less than my mortgage. Because the 401k loan that I used was NOT secured by the property, I never had to pay a day of mortgage insurance. So it’s a gamble that worked out very well for me.

By: glblguy

glblguy — Thu, 17 Jan 2008 20:11:08 +0000

@DragonLady – See, that is my concern is the gamble, especially in today’s volatile job market. And yes I met laid off…they call it displaced where I work

By: DragonLady

DragonLady — Thu, 17 Jan 2008 18:48:38 +0000

You mean, if I got laid off or fired, and had to pay it back immediately? In that case, I would have swallowed hard, paid some with savings, and put the rest ($10K or under) on my unused, low-rate (6%), emergency-only credit card. The payments would have been a bit fierce, but it would sure beat the $4000+ in penalties I would have had to take if I yanked it out of the 401k. I admit, I was taking a gamble at the time, but my job was stable, and it was a good risk.

By: glblguy

glblguy — Thu, 17 Jan 2008 18:10:15 +0000

@DragonLady – What would you have done had you been displaced just after borrowing the money?

By: DragonLady

DragonLady — Thu, 17 Jan 2008 16:46:22 +0000

Actually, I can think of one good reason to get a 401k loan: the first-time purchase of a primary residence. One of the only reasons my employer allows a 401k loan is for the first-time purchase of a primary residence. In 2002 I got a loan of $12,000 (the balance of my 401k was considerably larger than that) for just that sort of purchase. In return, this extra money (added to my savings) allowed me to get the house with enough down payment to avoid the dreaded PMI (Private Mortgage Insurance, also known as “money down a rathole”). Mind you, I kept saving the same amount into my 401k WHILE I was paying off the loan, and the second I got the opportunity to “roll over” that loan into a new Home Equity loan, I did.

Like all forms of debt, it’s all situational and depends on good judgement and lots of fiscal discipline. In my case, the loan was used to buy an appreciating asset, and said asset absorbed and eliminated said loan within a couple of years. (Still have lots of untapped, growing equity, too.) I can only wince when I imagine someone using a 401k loan to buy an overpriced $750,000 bungalo during the height of the housing bubble, then being “equity upsidedown” within the year….

By: glblguy

glblguy — Wed, 21 Nov 2007 00:25:54 +0000

@Justin – The biggest problem is you have to pay them back within 60 days of leaving your job. So if you are suddenly displaced with 20,000 in loans you have to scramble to pay it off. I would only advise them in extreme circumstances.

By: justin

justin — Wed, 21 Nov 2007 00:12:42 +0000

A 401(k) loan can be a decent solution if you are going to borrow the money anyway, the interest rate is decent, the stock market is tanking or going nowhere fast and you have a stable job.

Sure, lots of requirements, but they’re not impossible.

By: 10 Reasons to have an Emergency Fund | Moolanomy

10 Reasons to have an Emergency Fund | Moolanomy — Mon, 05 Nov 2007 14:02:35 +0000

[...] Borrowing from 401k will result in double-tax penalty, stunt your retirement growth, and may result in early withdrawal penalty if you fail to pay back the loan. Here are 7 reasons why borrowing from your 401k is bad, bad, bad! [...]

By: 7 costly retirement savings mistakes to avoid | Moolanomy

7 costly retirement savings mistakes to avoid | Moolanomy — Mon, 06 Aug 2007 16:28:29 +0000

[...] are some more write ups on the danger of borrowing against 401k: 7 Reasons Why Borrowing From Your 401k is Bad, Bad, Bad!, Warning: 401(k) loans are hazardous to your wealth and Borrowing from 401(k) can be easy, but [...]