The Good, the Bad, the Ugly of 401(k) Loans

Today, I want to talk about the good, the bad and the ugly about 401(k) loans.

I've been getting a lot of questions about 401(k) loans. Are they good? Are they bad?

And so, I wanted to have this conversation because there are some good things, right? One of the good things about the 401(k) loan is that you pay yourself back the interest. Today the interest rates are somewhere between probably 9% and 10% on 401(k) loans. So, I look at the interest you're paying yourself back as probably one of the good things.

But Jonathan, you also have to think about the bad things. The amount of money that you take a loan on is kind of sidelined. It's not invested. So, you're not able to earn as you otherwise would with your 401(k) savings for the duration of the loan.

Also, another bad aspect is if you leave your employer while you still have an outstanding 401(k) loan, the unpaid portion is considered income to you, and you have to pay not only a penalty but taxes on that money. So, it really could leave you hanging if you have an unexpected job transition while you have a 401(k) loan.

Now let's talk about the ugly part of 401(k) loans. When you take a 401(k) loan and you set the terms of the loan, they're set. You don't get to change those terms.

I actually had a lady one time who took a 401(k) loan and instead of making the payments over 5 years, set it for over one year. So, all those payments were combined. It was so bad that she was barely bringing home any money.

I look at 401(k)’s and there's some good things, there's some bad things, and there's some really ugly things when it comes to 401(k) loans.

Yeah, but it might be an option.

So, if you guys are evaluating whether taking a 401(k) loan might be a good option for you, give us a shout.

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