A. For someone who needs money, a loan from 401(k) or any retirement plan is a good option. Here are the pros:
- No credit check is required which means no lengthy approval process;
- Low interest rate on the loan, typically much lower than loans from other sources.
But there are cons as well:
3 Conditions to Meet
If you want to prevent the loan becomes a distribution from the retirement plan which carries tax and penalty, the following 3 conditions must be met:
- The loan must be paid back in 5 years
- The loan must be paid back with equal amount of amortization and on a quarterly basis
- The loan balance may not exceed certain limits (usually $50,000)
It's important not to default on the loan, which means the loan will be viewed as a distribution and the tax and 10% penalty will be imposed. Also, once you leave the employer, you have to pay back the entire balance within a very short period of time.