Consolidating your Debts with a 401k Loan

When faced with financial hardships, more and more individuals have begun to borrow against their 401(k). Though it is possible to reduce your interest rate by consolidating credit card debt with a loan against your hard earned 401(k), often times it has proven to be and unwise financial decision.

First of all, your tax-free, compounding interest dollars will be lost. The money used to pay off your debt could be worth several times more if it were left alone over a longer period of time. Taking these funds out prematurely could affect your retirement substantially. Furthermore, once disbursed to you, you will be required to list this as income on your tax returns; it will then be taxed.

Secondly, in the event that you are fired or offered a better position somewhere else, you may be required to repay the full loan balance immediately. If you are not able to do so, you may be responsible for high fees and tax obligations, which further diminishes your potential gains. Contrast this with another option for debt relief, known as debt negotiation where you can reduce the amount you owe by as much as 50%!

Also, borrowing against your 401(k) does not necessarily help your situation in the future, especially if you continue to practice behaviors that landed you in debt in the first place. This decision may patch the symptoms, but without changing your habits, the same problem is likely to reoccur.

*Please understand that the information above should not to be considered as financial advice. For financial advice speak to a licensed professional.