Struggling to make both ends meet is a common occurrence with increased cost of living and searching for loans is unavoidable for most of the people. There are various offers of loans for specific purposes and the terms and conditions of the loans depend on the types of loans that you choose for your requirements. Borrowing from 401K plans is considered for relief by many. However, as in any other loan, there are both advantages and disadvantages in this type of loan too, and depending on the financial condition and the requirements of a borrower it can be decided whether this loan is the perfect option or not.
Know the features of the 401K loan
The funds that are borrowed against one’s retirement savings are termed as 401K plans. Up to 50% of the savings amount or an amount of $50,000, whichever is lower can be borrowed from 401K plan. The interest rates of 401K loans are fixed and the amount towards the interest is paid into the 401K account. The borrowers are required to make repayments through their paychecks. The borrowers can avail the bad credit loan for a maximum period of 5 years. However, for most of the plans the term of the loan is only 60 days and if the borrowers do not have secured jobs, they are sure to encounter problems. If the loan amount is not repaid, a secured retirement life is impossible.
401K loans are exempted from taxes, but if the borrowers default on the loan repayments, they are accountable for taxes on the loan amount due. If for some reason, the borrowers with outstanding balance on their 401K loans leave their employment and choose to rollover the existing plan to a fresh one, the remaining amount is considered as the income of the current year and so is taxed. Borrowing from 401K plan is not allowed mostly to ensure retirement safety. However, this is not so with all the plans. There are provisions in some of the 401K plans to allow withdrawal.
You need to verify whether it is possible to withdraw funds from your plan or not. This can be done by approaching your 401K plan administrator or the company with which you have your 401K plan. Generally, borrowing from 401K plan is not allowed if you are no more an employee of the company with which your plan is associated. The credit report is not an issue for the approval of 401K loans. The interest rates are very low and for this reason the loan is much in demand. The loan is considered to be a good source to clear the high interest credit card debts.
Disadvantages of 401K loans
For those who are in need of funds for purchasing a house, for settling the medical bills, for education expenses and for such inevitable expenses, penalty fees are not charged for early withdrawal from their 401K plans. This also needs to be confirmed with the loan administrator as the eligibility criteria is not the same for all plans. There are some disadvantages in borrowing from a 401K plan. The loans are to be settled if the borrowers quit their employment or if they lose their job. Whether 401K no credit check loan is the apt choice for you or not depends on your needs and your ability to make repayments without difficulties.