By Heidi Pederson via Iris.xyz
The average household with credit card debt had a balance of $16,748 in 2016, nearly eclipsing the peak of $16,900 in 2008. With the average credit card annual percentage rate sitting at 15.8%, it represents an expensive way to fund spending.
Which leads many individuals to ask, “Does it make sense to borrow from my 401(k) to pay off debt or to make a major purchase?
Borrowing from Your 401(k)
- No Credit Check—If you have trouble getting credit, borrowing from a 401(k) requires no credit check; so as long as your 401(k) permits loans, you should be able to borrow.
- More Convenient—Borrowing from your 401(k) usually requires less paperwork and is quicker than the alternative.
- Competitive Interest Rates—While the rate you pay depends upon the terms your 401(k) sets out, the rate is typically lower than the rate you will pay on personal loans or through a credit card. Plus, the interest you pay will be to yourself rather than to a finance company.
Disadvantages of 401(k) Loans
- Opportunity Cost—The money you borrow will not benefit from the potentially higher returns of your 401(k) investments. Additionally, many people who take loans also stop contributing. This means the further loss of potential earnings and any matching contributions.
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