When seeking sources of credit funding, various factors must be considered. Comparisons must also be made among the different options available. One of the options overlooked by most people is taking a loan from their 401k plan. Two of the most common reasons loans from 401k plans aren’t taken into account by most people when seeking include not being aware of the loans as viable funding options and not being aware of the benefits of the loans and their suitability for certain scenarios.
It is therefore important to know the pros and cons of a taking 401k loan. To know when it is suitable to seek such loans and benefit from them, one should be able to answer the question why should you get a 401k loan? This ensures one is not overlooking a more suitable source of credit e.g. a cheaper loan or one with better rates or taking the loan for the wrong reasons. Below are some answers to the query why should you get a 401k loan? to help in making a sound decision.
Reasons for taking a 401k plan loan:
A loan from a 401k plan is one of the easiest, low-cost and quickest way of obtaining a loan. This can be useful in addressing serious, short-term liquidity needs. The loan should typically be paid in less than an year or a maximum of five years for loans taken out for a mortgage.
Loans form one’s 401k plan do not affect credit ratings and are not affected by them. Since one is basically borrowing from themselves, credit ratings play no role in such loans.
The interest of 401k borrowed loans are lower and more competitive compared to other types of loans. In addition, interest earned by the loan goes back into the the plan, essentially making the interest a contribution to one’s own plan. Since one is basically using their own funds, application fees for loans from one’s 401k plan attract little or no application fees. This ultimately makes them more cheaper when compared to most sources of credit.
One also has more flexibility when it comes to paying loans taken from their 401k plans. This is especially so when one wishes to repay the loan faster since it attracts no penalties as is commmn with most other loans. Since the loans are usually meant to address a short-term liquidity need, this flexibility is an important factor in decision making. It ensures one does not lose out too much on investment growth or incur a high opportunity cost. Repayment can be as quick as the loan applicant wishes and as soon as their ability allows them to.
There may be times when taking out the loan may be for growth reasons. Such loans can be used to fund mortgages and start businesses when no other forms of funding are available or when their terms and conditions are not as competitive.
It is important to keep in mind that there are disadvantages of taking loans against 401k plans. By knowing the pros and cons, one is in a better position to utilize their funds in a 401k plan as well as being in a better position to answer the question why should you get a 401k loan?
Sourced from: Dugout