{ "media_type": "text", "post_content": "Generally speaking, is it a good idea to get a 401k loan? How much is the interest rate on average? I am so thinking of getting $5k but not sure if I should do it or not.", "post_id": "5d7528539ec65d0022539c41", "reply_count": 52, "vote_count": 9, "bowl_id": "564a5cdb94887803001dd07c", "bowl_name": "Accounting", "feed_type": "crowd" }
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Generally speaking, is it a good idea to get a 401k loan? How much is the interest rate on average? I am so thinking of getting $5k but not sure if I should do it or not.

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Dave Ramsey isn't very impressive. I've read one of his books but I think he just uses scare tactics to get people who are really undisciplined to start taking care of their financial future. His ideas about avoiding debt at all costs are not sophisticated and I think we would do better to follow our own plans instead of letting him get into our heads. On the other hand I'm an advocate of thinking very little about money and focusing on relationships and learning. That is a lot more fulfilling and will lead to more happiness than thinking about our net worth.

likeupliftingfunny

I completely agree. Overthinking on money makes us more mechanical and takes away joys of living.

OP - look at your terms, (they vary) and what you are using it for. At Deloitte, it’s super easy, no penalty, and you pay yourself back with interest. I used the loan to buy a house. No regrets. The repay is auto-deducted from my paycheck. I know someone else who needed to use his to go back to school and make a career change that got him out of the construction industry. He makes twice as much now and no regrets. Don’t use it just to pay for a vacation or go on a trip or even to pay a few bills. But if the terms of borrowing are favorable and the reason for the 5k is an investment in your future it may make sense. (Alternatively, look at how long it would take if you made a plan to organically save the 5k, can you wait that long?)

likesmart
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Absolutely not! Please do everything you can to avoid it

likesmart

No, it’s a terrible place to take a loan. Dave Ramsey lays out why it’s a bad idea: https://www.daveramsey.com/blog/hands-off-that-401k

likesmarthelpful

EY2 this is absolutely true about the 10% penalty but keep in mind it’s only for loans in default and therefore have been deemed as distributions.

I did the math before borrowing the max out of my 401K ($50K). The interest rate was c.2.5% (Sept 2018). It basically allowed me wipe off $130K interest and 8yrs off my 30yr mortgage while costing <$2K in interest that I have to pay to myself over a 5yr period. Would absolutely recommend.

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Well in that case, also factor in that the real estate is less leveraged, and less risky, into the equation

Unless you are going to write a hot check without the loan... no. Just no.

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I have done it twice already and paid it off through payroll deductions. The interest is paid to your own account, is great to pay off debt or put a down payment

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I got 10k and it was the best thing I could do. I used it to buy the first house. The interest is just a little as 2% and it is interest I am paying back to myself, better than paying to banks for sure!! And there was no penalty at all, great option to use!

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I took several loans throughout my career. If you plan accordingly it’s a fine technique. Agree with many points above you have to pay within 60 days if you depart from company etc. however twice it worked out for me I happened to take loans before the market dropped. But that was luck. Be very disciplined if you take this route

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Agree on Dave Ramsey. My sister and her husband follow is “no debt” policy which yes they have no debt but have absolutely no extra cash for a rainy day, scary.

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Yeah i agree with Plante Moran 1. You're supposed to have at least 1K or 3 to 6 months of savings for emergencies if youre out of debt. Are you sure they have nothing...?

I tell clients
1. Make damn sure you are going to be employed at the firm for the duration of the loan pmts.
2. If your interest rate is say 5%, you pay it to yourself, so you have in essence created your own bond investment. If we go into a bear market or given the capital market expectations for equities in the next 5-7 years is at about 5.4%, that may not be a bad fixed return.
3. Use it for something constructive. Just like any debt, it can be a tool or in a fools hands a huge mistake.

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True for 1. With Vanguard you do have 90 days from the last day of your employment to pay it back. So either make sure you’ll stay employed or will have enough to pay it back if you leave.

Absolutely, yes! 5K is nothing, you can pay it off in no time and interest rate is below 6% and the best thing is you are paying to yourself! Do it only if it’s necessary!

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generally: no. however. I used it to supplement my down payment for my first house. I brought in a couple roommates and paid it off as soon as possible. I also used one for my second house to pay down the mortgage so PMI would go away. for the first loan I paid myself 3% and the second I paid myself 6%. the first loan was for 5 years, I paid it off in two. the second loan was for 3 years, I paid it off in one year. my jobs were stable both times and I paid them off ASAP both times. worked like a charm. I would not recommend taking them lightly.

likeuplifting

I did, and it made complete sense. I’m in a high tax bracket and high tax state. Using the 401k allowed me to purchase my home with pre tax funds.

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TL;DR
if you have financial discipline take out the loan, otherwise get control of your finances first

likehelpful

I am thinkin to get it out for my house deposit.. i am not a US citizen and ultimately would be returning back home in over 5-7 years time.

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Smarter to save for a few months....perhaps by lowering your monthly 401k deposit?

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I learned at a young age to NEVER take a loan from your retirement funds. You will need that cushion with you're old. No one will hire you at that old age and your medical bills will be high. it will be your only source of income from that point.

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Unless u need to pay for emergency medical procedure or ur bookie has come to collect gambling debt..then NOOOO! Just get a side hustle and earn the $5k then quit that side hustle

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Not a bad idea, as long as you pay it back. If you do not you’d incur tax penalties and it will be added to your income.

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I did it just to give myself a cash cushion when I bought a house. Interest rate was 6% but the interest is contributed to your 401k balance. Just make sure you can pay it back right away. After the dust settled on the purchase, I paid it back in one large payment, and the amount went back into investments.

Also, this was with Vanguard and was not a hardship withdrawal. Make sure to walk through the details with your provider and that it does NOT count as a withdrawal.

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