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Published on April 11th, 2014 | by Falcon

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Why A 401K Loan Might Be Your Be Option

When you are looking into obtaining a loan for any reason you might be weighing the different options that are available to you.  There are different types of loans for different reasons and you might be having a difficult time trying to decide what type of loan is best for you.  One of the most common types of loans that are often overlooked is a 401k loan. 

What Is A 401K Loan

A 401k loan is a loan that is taken against your 401k retirement plan that is usually issued through your employer.  This type of a retirement savings plan is one of the best for the simple fact that the money you are saving comes directly out of each of your paychecks and is taken out before taxes are so it is tax-free.  Essentially when you take a loan against your 401k plan you are borrowing from yourself and are replacing the amount when you pay the interest and principal.

How These Loans Work

You will need to see if your 401k plan allows you to borrow from it.  If you are then you will probably be allowed to borrow up to fifty percent of the account balance that is vested or up to the maximum amount of $50,000.  You will then have a time period of up to five years to pay back the loan in full.

Benefits To Borrowing From Your 401k Plan

If you are looking into the option of borrowing from your 401k plan you will find that there are many benefits.  The first and probably the most popular of these reasons is that there is not an application to the bad credit loan process.  Many people like this idea because there is not a credit check involved and if you do not have the best credit history in the world it will not be held against you.

The second reason is that the interest rate that comes with these loans is very low.  The amount of interest that you will pay is set by your 401k plan and is usually much lower than that of the prime interest rate that is used to set the basis for traditional loan rates.

You will also find that when you borrow from yourself you will receive a good return.  For instance is you have an account that earns a three percent interest rate and you borrow from it the interest rate you will have to pay back is usually going to be much higher such as six percent.  This allows you to earn a profit on the money that you are borrowing.

Another benefit is that the interest you are incurring on your loan will be tax-free.  You will find that the money will remain tax-free until you reach the age of retirement when you withdrawal the entire amount of money from your 401k plan.

Conclusion

If a 401k loan sounds like the perfect option for you it is convenient for you to apply.  All you need to do is complete a simple form or even make a telephone call to get the process started.  If you have any further questions you can check with your employer.  If they cannot answer them they should be able to get you to someone who can.

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