401k Loans Vs. Installment Loans

Are you thinking about taking out a loan? Would you prefer to take a loan from your 401k or as an installment loan or a payday loan alternative? Do you know the difference? What are the pros and cons of each? Let’s take a closer look.

401k Loans

Some people actually do consider taking a 401k loan. However, there are others who believe that tapping into that retirement savings is somewhat of a desperate move… and it is. However, in certain cases, it can also be a sound decision. The thing about it is that you need to know exactly what you are getting into when it comes to risk, payback, and time.

Here is a quick look at some of the pros and cons of taking out a 401k loan.

Advantages

  • 401k loans do not incur any sort of income tax or other penalties for withdrawing early unless you default on the loan.
  • There are no application forms or credit checks, which opens up your options if your credit isn’t the best.
  • Most of the time, the funds are quickly available ad you are able to borrow from your 401k for nearly anything.
  • Most of the time, 401k loans are available with cheaper interest rates than those charged by credit cards.
  • The interest that is paid on loans of this type are paid to you as opposed to the lender.

Disadvantages

  • When you borrow from your 401k, you take that money away from investments and possibly from gains.
  • Anything you borrow will be taxed twice.
  • You end up contributing less to your own retirement fund due to having to pay the loan off.
  • Not every 401k plan allows for borrowing from it.
  • If you leave your job for any reason, the whole loan becomes due at the end of 60 days.

Now let’s take a peek at the pros and cons of an installment loan.

Advantages

  • A large advantage to this type of loan is that you can usually have the cash you need in a day or less, which is great for when you have an emergency.
  • People who have little credit history or even bad credit can find it easier to qualify for this type of loan as long as they have verifiable employment, an active checking account, and a social security number.
  • People who don’t want to share the reason they need the money don’t have to – there are no questions asked.
  • You know right away what your payments will be and when they will be due.
  • Payments do not fluctuate.

Disadvantages

  • Usually, there is a limit to the amount of money that can be borrowed. These types of loans are generally for around $1,250.
  • If you are unable to pay this type of loan back on time and on schedule, your credit can and will suffer.
  • Interest rates for this type of loan are typically higher than what you would expect to find at traditional lending institutions, this is the price you pay for the quickness of the loan.
  • If you renew the loan or take the entire amount of time allotted to repay it, you will be paying back much more than you borrowed.

Whatever you decide to do, both types of loans can be a good decision or a bad decision, depending on the situation you are in and your ability to pay back the loan. Take your time with this decision and make sure that you weigh all of your options before taking any sort of action.