Following are the advantages and disadvantages of 401K loans which should be remembered by each and every prospective loan taker. This will help the potential loan taker to avoid the obvious uncertainties.
Advantages of 401k loans
You need not require having credit cards to qualify for this loan. This loan does not cast an impact on your credit ratings either. In short, this loan has nothing to do with your credit cards.
It does not involve complexities in your procedure of withdrawal. In case you require money for emergency or any other convincing reason; you can simply withdraw money from your retirement balance and pay it back. The transaction is also made within a week or two which is faster than most of the loan options.
The interest rate that it involves is generally low. You are also paying the amount back to yourself because it is both the payment and the interest that goes to your 401k account.
The loans do not charge any application fees. If charged, they are kept as low as possible.
You can avoid 10 % 401k early withdrawal penalty fees.
Disadvantages of 401k loans
The withdrawal of the money causes your retirement fund to stop flourishing till the loan is paid back.
In case you lose your job the entire amount of your loan must be paid back within 60 days. Even if you are unable to pay the loan, you are subject to a premature 401k distribution. One must therefore be well informed on the termination risks before borrowing the loan.
Another disadvantage of borrowing the loan is the negative impact of taxation on your money. The post tax dollars taxation repayment can make the matter worse. It gets worse when the loan is taken when one has already retired. This is because they pay double tax on the same money.
While you have withdrawn your money, you could still be saving the same for your golden years and it could be growing over the years.
Since you have to repay the loan through payroll deductions, you get a smaller paycheck.