When you are funding your employer-sponsored scheme of 401(k), the amount you are putting in the fund would grow into a huge amount of money. It is also the easiest source of emergency money in dire situations when you have exhausted every other financial resource.
Applying for a 401(k) loan offers low-rate interest money. You would have to understand its advantages and disadvantages and know the proper way to handle the repaying of this loan. Only by understanding how the loan scheme works will you be able to decide whether to apply for it or not.
1. Maximum loan limit
Generally, any loan scheme under the 401(k) plan would only allow 50-60% of your total retirement fund. The upper limit of the amount of money that can be taken under this scheme is about $50,000. The upper limit of the loan would exceed the pre-defined limit if the amount of money exceeds by the calculation of 50%.
You would be allowed to apply for loan several times from your 401(k) retirement funds. If you are married, then you would need a written approval from your spouse while you are applying for a 401(k) loan that exceeds $5,000.
2. Maximum loan term
When you would apply for a loan under the 401(k) loan scheme, all calculations are done based on the standard of a five-year plan. Therefore, it is expected that you would be able to repay the amount of borrowed money within five years. But there is an exception: if you are using the borrowed money for building your house then you can repay it over a period of more than 10 years.
3. Advantages of taking 401(k) loans
One of the major advantages of taking this loan is the interest rate which is pretty low when compared to other loans from a financial institute. Applying for a 401(k) loan is the quickest way to get access to cash in times of need.
Another advantage of taking this loan would be that you would not have to be harassed from creditors and other agents from financial institutes. As you are borrowing money from your account, there would be no possibility of credit check.
4. Disadvantages of taking 401(k) loans
According to financial experts, the major disadvantage of taking a 401(k) loan scheme would be an interruption in the growing period of your retirement fund. Taking on the 401(k) loan scheme would mean breaking the circle of high-interest rate that is compounded annually. This would seriously reduce the amount of money you might have gotten at your retirement. Penalties for defaulting the repayment is another major disadvantage for taking the 401(k) loan scheme.
Thus, we can say that though this scheme might be the easiest way of getting money, it’s always better to look for an alternative before breaking your retirement funds. This loan scheme would be best for emergencies where you have no other way to get money. Therefore, if you are considering the 401(k) loan scheme, make sure to remember the points mentioned in the article.