Personal Finance. Your Practice. Popular Courses. Part Of. Know the k Rules. How k s Work. Roth k s: The Alternative. Other Types of k s. How Much Should You Contribute? Making Money With Your k. Getting Money From Your k. Rolling Over Your k. Retirement Planning K. Table of Contents Expand.
When a k Loan Makes Sense. Top 4 Reasons to Borrow. Stock Market Myths. Debunking Myths With Facts. The Bottom Line. Reasons to borrow from your k include speed and convenience, repayment flexibility, cost advantage, and potential benefits to your retirement savings in a down market.
Common arguments against taking a loan include a negative impact on investment performance, tax inefficiency, and that leaving a job with an unpaid loan will have undesirable consequences. A weak stock market may be one of the best times to take a k loan. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.
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Partner Links. Related Terms What is Installment Debt? Installment debt is a loan repaid by the borrower in regular payments. Read about different types of installment debt, along with their pros and cons. Hardship Withdrawal This emergency withdrawal from a retirement plan may be allowed for exceptional needs, but is often subject to tax or account penalties. What is a k Plan? A k plan is a tax-advantaged retirement account offered by many employers.
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Will a k loan appear on my credit report? Loans from your k are not reported to the credit-reporting agencies, but if you are applying for a mortgage, lenders will ask you if you have such loans and they will count the loan as debt. If I default on my loan, will the default be reported to the credit-reporting agencies? If you default on a k loan, the default will not be reported to the credit-reporting agencies and it will not negatively impact your credit rating.
If I can't afford to keep making the payments on my loan, can I stop them? Once the loan has been made, your payments will be deducted from your pay each month and you generally can't stop this process.
You then repay the loan gradually, including both the principal and interest. The interest rate on k loans tends to be relatively low, perhaps one or two points above the prime rate , which is less than many consumers would pay for a personal loan. Also, unlike a traditional loan, the interest doesn't go to the bank or another commercial lender, it goes to you.
Since the "interest" is returned to your account, some argue, the cost of borrowing from your k fund is essentially a payment back to yourself for the use of the money. These distinctions prompt select financial counselors to endorse retirement-fund loans , at least for people who have no better option for borrowing money. Many more advisors, though, counsel against the practice, almost no matter the circumstances. Borrowing from your k , they say, goes against almost every time-tested principle of long-term investing.
Here are eight key reasons you probably shouldn't dip into your k plan until retirement or use it before that as a piggy bank for loans. The leading purported plus of a k loan—that you're simply borrowing from yourself, for a pittance—quickly becomes questionable once you examine how you'll have to repay the money.
Keep in mind that the funds you're borrowing were contributed to the k on a pre-tax basis. But you'll be paying yourself back for the loan with after-tax money. Put another way, in such a tax bracket, making your fund whole again would essentially require almost one-quarter more work than was the case when you made the original contribution. While you're borrowing funds from your account, they won't be earning any investment return. Those probable missed earnings need to be balanced against the supposed break you're getting for lending yourself money at a low-interest rate.
However, Twining points out that "there is an 'opportunity' cost, equal to the lost growth on the borrowed funds. That's] an expensive loan.
If you borrow money from your k account, some plans have a provision that prohibits you from making additional contributions until the loan balance is repaid.
Even if your plan doesn't stipulate this, you may be unable to afford to make contributions while you're repaying the loan. Such a freeze in additional funding will deprive the account of money that should, in the long run, multiply many times in value through compound earnings. Most calculations suggest that your money will double, on average, every eight years while invested. The gap in what you might have made will be wider still if your skipped contributions lead to missed matches to those funds by your employer—since such a perk essentially represents free investment money for you.
The drawbacks above assume you'll be able to make the scheduled payments to your fund on time and without undue hardship. However, should you be unable to repay the loan, its financial implications go from bad to worse.
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