In our last two blog posts, we discussed the rules on 401(k) loan. Now we will show the main benefits of borrowing from 401(k).
The Benefits of Using 401(k) Loan
1) Easy to Borrow
A 401(k) loan is easy to get - there is no loan underwriting or credit score requirements.
2) Net Cost of Zero
Borrowing money has a cost. However, a 401(k) loan means the employee borrows his or her own money out of his or her own retirement savings account, such that the borrower’s 401(k) loan repayments of principal and interest get paid right back to themselves. Consequently, even though the stated 401(k) loan interest rate might be 5%, the borrower pays the 5% to themselves, for a net cost of zero.
However, this doesn’t mean a 401(k) loan should be considered part of an investment strategy. We will discuss in the next several blog posts the downsides of 401K loan.
The Benefits of Using 401(k) Loan
1) Easy to Borrow
A 401(k) loan is easy to get - there is no loan underwriting or credit score requirements.
2) Net Cost of Zero
Borrowing money has a cost. However, a 401(k) loan means the employee borrows his or her own money out of his or her own retirement savings account, such that the borrower’s 401(k) loan repayments of principal and interest get paid right back to themselves. Consequently, even though the stated 401(k) loan interest rate might be 5%, the borrower pays the 5% to themselves, for a net cost of zero.
However, this doesn’t mean a 401(k) loan should be considered part of an investment strategy. We will discuss in the next several blog posts the downsides of 401K loan.
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