The Pros and Cons of Taking Out a Loan Against Your 401k – Smb Suggestions

The Pros and Cons of Taking Out a Loan Against Your 401k

The first thing to know about a 401k is that it is primarily your money. The second thing to remember is that 401k’s have both pros and cons that need to be considered before taking a loan against your 401k.

In this article, we are going to explore both sides of the argument.

Pros of 401k Loans

First, let’s talk about the advantages. If you have enough money in your 401k, you can take out any size loan that you require, in addition to paying interest to yourself. This is because any interest you pay will go back to the 401k plan. There are other benefits, too, such as individuals not requiring co-signers or credit checks to take out a loan. The money is readily available, and while penalties for defaulting on a loan are severe, they are not as harsh as defaulting on a conventional bank loan.

Cons of 401k Loans

That said, there are cons to taking out a loan against your 401k as well. Everyone has to consider both sides of the argument before committing to the loan. The main thing to note is that when taking out a 401k loan, you are borrowing money from yourself, and you are still required to pay interests and fees. Do not mistake 401k loans as being something free. In fact, sometimes, individuals end up paying taxes twice on their money. Also, when taking out the loan, you have to establish a set amount of time to pay the loan back. This amount of time tends to between be the one to five-year range.

Takeaway

There are many benefits of 401k loans, and while the cons of taking out these loans are pretty substantial, they have to be considered before individuals make the decision.

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