I’ve recently considered taking a 401k loan in order to pay off some higher interest credit card balance that I’m currently carrying.  I know Dave Ramsey doesn’t approve of them because of the risk of leaving your company, but personally I feel if you’re truly dedicated to getting out of debt, and won’t just run your credit cards up again, then this can be a huge boost to becoming debt free.

401k Loan Rules

Here are the rules my company has to get a loan from a 401k:

  • Only 1 loan at a time
  • No more than 1/2 of your vested 401k worth
  • No more than 5 year pay back period
  • 7% interest (paid to yourself)
  • $150 loan origination fee

I know these rules vary slightly from company to company.  My mother-in-law can have two loans at a time and it’s only 4% interest.

401k Loan Repayment

Every 401k loan plan I’ve seen require automatic check withdrawal for repayment.  If you get paid every two weeks, and withdrawal will be made every 2 weeks.  Here’s the scary part, if you leave your job (or worse fired from your job) you have to pay all the money back within a short period of time (1 – 2 months) or the unpaid portion will be considered income, you will owe taxes on it, plus a 10% early withdrawl penalty to your friendly IRS tax collector.

Reasons for a 401K Loan

Most reasons people take a loan from their 401k is to pay for school or medical bills.  Sometimes you can get a special loan with a 15 year repayment if purchasing a home, more likely if it’s your first home.  Paying off other debts and the traditional and not highly recommended house remodeling and vacations.

Overall, I’m only now willing to borrow from my 401k because I’m positive I’ve changed my spending habits and my job is steady.

Related posts:

  1. Why Should You Roll Over Your 401K?
  2. 401K Rollovers (Gimme My Money Back)
  3. Is Rolling Over Your 401K For Everyone?
  4. All About Getting Loans With Bad Credit
  5. Which is best? Roth IRA VS 401K

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