Yesterday it was mentioned that a WalletPop article had mentioned loans that people should avoid if at all possible. Only one was written about yesterday. There are more than just the payday loan, which I am proud to say that I have not taken. The next loan type is a 401(K) loan.
Most 401(K) plans permit the borrower to borrow half of the value of their 401(K), or $50,000 whichever is lower. Basically, you have up to five years to repay that balance, and it is taken out of regular payroll deductions. They usually charge the prime interest rate plus 1%, which is around 4.25% currently. That isn't bad. What is bad is that should you leave your job (or your job leaves you), you have to repay that loan immediately, or you are subject to a 10% early distribution penalty in the eyes of the IRS. Plus, the income tax on the remaining balance because you have had the money withdrawn pre-tax previously and now it is computed in your income.
This move may make sense number-wise, especially if it is used to pay down credit card debt (but you really shouldn't do this). Instead of paying 15-25% to a credit card, you are paying that interest back to yourself. But, in today's economy, is your job stable? Are you likely to continue to have your job? Can you afford the money taken out of your check?
Weigh this option carefully, and have a GREAT day!
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