401K loans? good option?

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SirJames

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Question, would you reduce your current 401k contributions in order to pay the loan off?

Or can you afford to make the payments, just want a lower interest rate?


I'm not a financial expert, but the general advice I have received is to not ever do this. The only reason I can think of is to avoid foreclosure on my primary household or help me get above water on a mortgage to refinance.


Do you know your wifes credit score? Can you take out a car loan in her name only?

Also, please don't listen to the financial adviser guy he screams 30 year coke head douche bag. His E-fighting on the message board here should be all the proof you need.
 
mkopec

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Yeah, you guys basically talked me out of it, and of course reading more about it.
 
Shonuff

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mkopec_sl said:
Yeah, you guys basically talked me out of it, and of course reading more about it.
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It would be better to take the higher rate and fix your credit, rather than rob your retirement. When we got married, I looked at my wife's cc score, and we ended up paying 10% interest on her car, with me as a co-signer. Her score went from 538 to 720 in about two years. I could have financed her car under my name (I had over 800+ before I bought my business), but we decided we'd rather pay an extra $50 a month to help fix her credit. It's a better decision, when looking at financial well being from the gestalt. When your score is fixed, you get lower rates on your other stuff, and you can always re-fi if $50 a month is breaking your back.
 
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Unidin

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I'd just like to add that if you can't pay the loan in full if you get terminated it's not just the 10% IRS penalty you'll pay. Those funds also become taxable.

As someone that also has his 6, I would tell you to get the higher interest loan. The cost difference between a 6% and an 11% loan on a 5 year car loan is only $2 per $1000 loaned. It's a small price to pay to let your retirement grow and rebuild your credit.
 
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Soriak_sl

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As others have said, you should get the loan at the higher rate rather than borrowing from your 401(k). However, you may want to stop your 401(k) contributions and pay off the loan quicker, if you can do so without penalty. 11% is a higher rate than you can expect on your retirement savings... so pay off the loan faster, if you can.

Also, as has been said before, you may want to look into financing a slightly cheaper car, if you can find a reliable one. e.g. last year's model used.

One last thing: do not get your financing from the dealership. Go to your bank and other banks to see what kind of rates you could get for a car loan. There's a very good chance that you can get a much better deal if you don't go through the dealership. Then, make sure to negotiate on the car price separately from any payment terms. Dealerships try to confound deals on the car and financing, which makes it harder to evaluate whether either of those is a good deal.
 
opiate82

opiate82

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Soriak_sl said:
11% is a higher rate than you can expect on your retirement savings... so pay off the loan faster, if you can.
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One thing about the 11% return, you should also include any matching contributions by your employer when figuring that out. So matching+return might equal more than 11%.

Soriak_sl said:
One last thing: do not get your financing from the dealership. Go to your bank and other banks to see what kind of rates you could get for a car loan. There's a very good chance that you can get a much better deal if you don't go through the dealership. Then, make sure to negotiate on the car price separately from any payment terms. Dealerships try to confound deals on the car and financing, which makes it harder to evaluate whether either of those is a good deal.
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I actually had the opposite experience with financing. I had already gone to my bank to figure out what I could get and was looking at 2.75% from them. Went to the dealership, they offered me a "great" rate of 8% at first. Laughed and told them what I could get through my bank, they came back at me with 1.25%. I was a little peeved they tried to fleece me at first (but not surprised) but was happy with the lower rate.

I would definitely check with your bank, and a couple of others first. But dealerships seem to have a lot of wiggle room on negotiating financing atm (what I have read, not just my anecdotal experience).
 
Tuco

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Soygen_sl said:
Your 401k is money you should not be touching. If you take a loan out, say 5,000.00. That was (assuming you have a traditional 401k and not a Roth 401k) pre-tax money. You then pay that $5,000.00 back post-tax. Assuming you're in the 25% tax bracket, you'll actually be paying back $6,666.00 + whatever interest and fees the 401k provider charges for the loan. Then on top of all of this, when you do retire, you'll get taxed again on that money when you withdraw it. So you're losing a lot more than just the 5k.
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If that's true, fuck ever borrowing from the 401k account. You might as well take a payday loan...
 
mkopec

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Tuco_sl said:
If that's true, fuck ever borrowing from the 401k account. You might as well take a payday loan...
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This is incorrect, as the only thing that is double taxed is the interest you are required to pay, which is minimal. If you borrow $10,000 from your retirement plan, you receive $10,000 to use as you want-you don't have to pay taxes on it. Putting that money back into your plan account doesn't involve paying additional taxes. You're just repaying money you borrowed. Yes, you're using after-tax money to replace your pre-tax money. But you also used pre-tax money to, for example, buy a car, or pay off credit cards, so it all evens out.
 
Shonuff

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mkopec_sl said:
This is incorrect, as the only thing that is double taxed is the interest you are required to pay, which is minimal. If you borrow $10,000 from your retirement plan, you receive $10,000 to use as you want-you don't have to pay taxes on it. Putting that money back into your plan account doesn't involve paying additional taxes. You're just repaying money you borrowed. Yes, you're using after-tax money to replace your pre-tax money. But you also used pre-tax money to, for example, buy a car, or pay off credit cards, so it all evens out.
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But if you do screw up and somehow manage to not be able to pay the loan back, you might be facing tax penalties in the range of 50-60%, worst case scenario.
 
Ishad

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We are doing a 401k loan for our home purchase. I wasn't crazy about it at first, but in our situation it is a good option.
 
Tuco

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mkopec_sl said:
This is incorrect, as the only thing that is double taxed is the interest you are required to pay, which is minimal. If you borrow $10,000 from your retirement plan, you receive $10,000 to use as you want-you don't have to pay taxes on it. Putting that money back into your plan account doesn't involve paying additional taxes. You're just repaying money you borrowed. Yes, you're using after-tax money to replace your pre-tax money. But you also used pre-tax money to, for example, buy a car, or pay off credit cards, so it all evens out.
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Who receives the interest payment?
 
Falstaff

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Ishad_sl said:
We are doing a 401k loan for our home purchase. I wasn't crazy about it at first, but in our situation it is a good option.
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I knew about this but for some reason didn't think you had to pay it back. It was just treated as tax free early withdrawal if you applied it towards your down payment.
 
Tarrant

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I've only ever taken out a 401K loan once and paid it back a few months later. I'm to paranoid of a person to just pay it back over the 3 years they allowed me but I was up against a wall and needed the money at the time.
 
Soygen

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mkopec_sl said:
This is incorrect, as the only thing that is double taxed is the interest you are required to pay, which is minimal. If you borrow $10,000 from your retirement plan, you receive $10,000 to use as you want-you don't have to pay taxes on it. Putting that money back into your plan account doesn't involve paying additional taxes. You're just repaying money you borrowed. Yes, you're using after-tax money to replace your pre-tax money. But you also used pre-tax money to, for example, buy a car, or pay off credit cards, so it all evens out.
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You're right. Sorry about passing along that misinformation.

While you're taxed twice, the total taxation ends up being the same. The issue is more with lost gains/opportunity as mentioned in my original post. Like I said, unless it was a true emergency, I wouldn't touch the money.
 
mkopec

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Yeah, thats the way Im looking at it now. Corndog made that clear with his post and made me think, what happens when I have atrueemergency and need the cash?
 
Tuco

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So the only problem with 401k loans is if you can't pay them back or the loss in gains from the time period you loaned the money? It doesn't seem like that bad of an idea then, at least for a short term, not that I'd ever do it under normal circumstances.
 
Shonuff

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Tuco_sl said:
It doesn't seem like that bad of an idea then, at least for a short term, not that I'd ever do it under normal circumstances.
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You better have a real good reason why. I remember, when I got out of grad school, I had a hard time getting a job, and was overqualified for 95% of the jobs I was applying for. Times were tough, I had no income, but we tightened our belts rather than tap my 401k. At the time, I had about $100k sitting in the account, and it could have made my life a lot easier.

If we gave up and tapped the money, I wouldn't have had the down payment for the business I own. I learned along time ago, it's better to keep your options open, rather than closing them. We built up our nest egg, and refused to touch it. If I've got to go deliver pizzas to stop from touching it, I will. We made a conscious decision to do whatever it took to not touch our nest egg.

Now I make more in some months than I did in a year working for someone else.
 
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