Should you borrow on your 401 (k)?

By Heidi Pederson via

The average household with credit card debt had a balance of $ 16,748 in 2016, almost eclipsing the high of $ 16,900 in 2008. With an average annual credit card rate of 15.8%, that’s an expensive way to save money. finance expenses.

Which leads many people to ask, “Does it make sense to borrow on my 401 (k) to pay off debt or to make a major purchase?”

Borrow on your 401 (k)

  • No Credit Checks: If you’re struggling to get credit, borrowing from a 401 (k) doesn’t require a credit check; as long as your 401 (k) authorizes loans, you should be able to borrow.
  • More Convenient – Borrowing on your 401 (k) generally requires less paperwork and is faster than the alternative.
  • Competitive Interest Rates: While the rate you pay depends on the terms stated in your 401 (k), the rate is usually lower than what you will pay on personal loans or credit cards. Plus, the interest you pay will go to yourself rather than a finance company.

Disadvantages of 401 (k) loans

  • Opportunity cost — The money you borrow will not benefit from the potentially higher returns on your 401 (k) investments. In addition, many people who take out loans also stop contributing. This means the additional loss of potential income and any corresponding contribution.

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