Borrowing money from a 401(k) plan should be one of the first options to consider when you are looking at a short-term liquidity requirement. Ideal duration for borrowing this loan is typically a year or less than that. Applying for a 401(k) loan is a more viable option than choosing a title loan or a payday loan. Additionally, the accompanying high-interest rates of these options make a 401(k) loan a much financially smarter move in comparison.
Considering the viability as mentioned earlier, here are four more benefits of applying for a 401(k) loan and borrowing a lump sum from it:
1. Convenience and short duration requirement
For most 401(k) plans, procuring a loan is very easy. It does not warrant credit checks and is not accompanied by the filing of lengthy applications. Since no credit inquiry is made against you, your credit score remains intact. Depending on your 401(k) plan, you can procure a loan with just a few clicks on the website. Once you are done applying for a 401(k) loan, you will get your check within a short-stipulated duration, without your privacy hampered.
2. Flexibility in repaying the loan
Typically, most 401(k) plans come with a five-year amortization schedule for repayment. However, you can make repayments for the loan at a much faster rate with no penalty for prepayment. Most of these plans allow you to make repayment through different payroll deductions as well. To keep a record of your repayment schedule, consider the various credits earned to your loan account and the balance that remains as the principal amount. This works just like a regular bank loan statement and helps you understand how much amount needs to be paid when.
3. Benefits for your retirement
Applying for a 401(k) loan does not produce any negative impact on your retirement savings. The effect can be neutral if any of the lost investment earnings match up to the interest paid. So, if the interest you are paying is higher than any earnings lost in the investment you have made with your 401(k), than taking a loan against it can help in increasing the savings for your retirement.
4. Gives you a cost advantage
One of the most significant advantages of borrowing from your 401(k) is that there is hardly any additional cost involved. While you may need to pay a minimal loan origination fee or give away a little for administration costs, the overall additional funds incurred are very less. Here is how it generally works: You mention the investment accounts from which the money needs to be borrowed. These investments are then further liquidated for the entire loan duration. Even though you would lose the positive earnings which could have been produced on the borrowed amount for the stipulated term, you would not lose any investment returns on this money in case the market goes down.
In a nutshell, do not shy away from choosing the liquidity option that comes with your 401(k) plan. If you keep a tab of how much you are borrowing in times of emergency then your transactions can be convenient and easy. Even so, we strongly recommend that you have a clear schedule of repayment charted out before applying for a 401(k) loan.