Benefits of Borrowing from your 401k

If you ask any financial advisor if it is a good idea to borrow from your 401k, you will likely be hit with a flat-out “no”, followed by a whole slew of reasons why you should not ever think of borrowing from your 401k. While your financial advisor is looking out for your future, sometimes you need to look out for the here and now and there are quite a few positive aspects when it comes to borrowing from your 401k. Before you consider taking a loan against your 401k, you need to look to see if you plan involves a loan provision which will allow you to take up to half of your current 401k balance or $50,000 – depending on which is less.

Keep in mind that loan provisions start repayment on your next paycheck and a loan used for any purpose besides buying a home will need to be paid back within five years. Also beware that if you leave your current employer, you have 60 days to repay your loan. 

While that may seem like a big disadvantage, don’t worry – there are plenty of advantages for smaller, short term loans against your 401k. When you take a loan from your 401k, there’s no credit check and there’s no impact on your credit – because you’re essentially taking the loan out against yourself and your own savings. Additionally, you’ll have an interest rate on your loan but the interest goes back into your account. Rather than paying interest to a bank or credit card, you are paying interest back to yourself – which adds up!

Another advantage to borrowing from your 401k is the lack of fees. Since you are borrowing against yourself, and there is no outside lender involved for outright distribution, the only fee you actually pay is the above mentioned interest – which is just repaid to you. The beauty of borrowing from your 401k really lies in the lack of fees and the speed in which you receive the funds. Again, you’re not dealing with a bank or a financial institution so the paper work that would be associated with taking out a loan is gone. Your employer should have an application but if an outside party handles your 401k, chances are the information is digital and you’ll only need to log into your account. There is also no credit check so the process is shortened even more.

In short, borrowing from your 401k is great when you need a quick fix and a short-term loan and not for a large, frivolous purchase.