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Borrowing against 401K to pay off credit cards & loans

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dfeteau
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Borrowing against 401K to pay off credit cards & loans  Reply with quote  

I have 2 credit cards (one at 9.24% and one at 28.99%) and 1 private school loan (11%) that cost me about $400/mo. Total balance on them is about $11K. I was thinking of borrowing against my 401K to pay them off at a lower interest rate (3 to 4%). If i choose the 3 year loan, my monthly payments would be about $350/mo. So i'd be saving money (and tons of interest). My only concern is that I'm waiting to close on a house and I wonder if i should try to do whatever i can to pay those off without touching my 401K so i can use that money instead to update the house i'm buying.

Thoughts?
Post Sat Jun 29, 2013 4:50 pm
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oldguy
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One problem would be the loss in your 401k. It has probably been earning clsoe to 20% for the past 3 years (the market has done very well since 2009). When you pull money out of the investment (for a loan) that stops the growth. So - in gernal, it would be bettter for you to pay the 9% and 11% and keep earning 20%.
But what is the story on the 29% loan - is your credit score that bad? I am surprised that you could get a mortgage? Is there some way that you can sell something so that you can get rid of the 29% loan? Maybe sell a car? Or refi a car at 6% or 8% and use the car loan to re-pay the 29% loan?
Post Sat Jun 29, 2013 5:33 pm
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dfeteau
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Thanks for the reply oldguy. The 29% is on a credit card and it had a low balance (<$2K). My credit score is actually pretty good. The only reason that rate is so high is because I inadvertently missed a payment.

I do like the idea of possibly either refinancing my car or trading it in for a cheaper car but I believe that I might be upside-down on my loan if I try.

I think what i might need to do is sit down with my bills and expenses, see where i can cut down and see where i can double up to get them paid quicker.

thanks for the help. if there are any other suggestions, i'm open to reading them.
Post Sat Jun 29, 2013 5:50 pm
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oldguy
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quote:
I do like the idea of possibly either refinancing my car or trading it in for a cheaper car but I believe that I might be upside-down on my loan if I try.


Good that the 29% loan is <$2k. Fortunately only a small part of your $11,000.

Sounds like a late-model car. You can advertise, find a buyer, then set up a meeting with your lender. Your buyer pays the lender, gets title & keys, and you get a personal loan from your lender for the shortfall. The important thing is to get a $5000/yr car payment stopped. You can use tha extra $5000 to buy an affordable car and pay-of the personal note.
Post Sat Jun 29, 2013 8:03 pm
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clydewolf
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Re: Borrowing against 401K to pay off credit cards & loa  Reply with quote  

quote:
Originally posted by dfeteau
I have 2 credit cards (one at 9.24% and one at 28.99%) and 1 private school loan (11%) that cost me about $400/mo. Total balance on them is about $11K. I was thinking of borrowing against my 401K to pay them off at a lower interest rate (3 to 4%). If i choose the 3 year loan, my monthly payments would be about $350/mo. So i'd be saving money (and tons of interest). My only concern is that I'm waiting to close on a house and I wonder if i should try to do whatever i can to pay those off without touching my 401K so i can use that money instead to update the house i'm buying.

Thoughts?

The most you can borrow from a 401k account is the lesser of 50% of your account balance or $50,000.

Another downside using a 401k loan happens if you were to lose your job before the loan is paid off. The loan balance would need to be paid or considered a distribution from the 401k. As a distribution from the 401k, income tax would need to be paid, and perhaps the 10% penalty for early distribution.

Most 401k plans do not allow contributions to the plan while you have an outstanding loan balance. If that is true for your 401k it may be best to stop your contributions for a period and apply that amount to your outstanding CC and Student loans.

Reduce your expenses where you can, and then reduce or eliminate your 401k contributions for for a period. Apply this extra "available cash" to your outstanding loans.

Note that by eliminating or reducing your 401k contributions your income tax withholding will increase.
Post Sun Jun 30, 2013 6:19 pm
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littleroc02us
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At all costs unless to avoid a bankruptcy never touch your retirement for anything. Think of it as off limits and find another solution as the guys around here have suggested. The good part is that it's only 11k. Buckle down for a couple years and work your butt off to pay this debt.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed Aug 14, 2013 1:51 pm
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coaster
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I wouldn't borrow from the 401(k) for home improvements, either. It takes a heck of a long time to get your money back on home improvements. Sometimes never. Home improvements on your primary residence should never be thought of as an investment. Your money will work a lot harder for you growing in your 401(k) than it will in your new kitchen. Smile

~Tim~
Post Wed Aug 14, 2013 4:49 pm
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norrisgallagher45
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There are pro's and con's for borrowing against your home and they all need to be taken into consideration before you proceed with any additional borrowing. On the one hand the money you can borrow on your home will be of a lower interest rate than most other forms of loans and this can help you to reduce your monthly repayments by using the house money for clearing more expensive debt. With the ability to spread the term of repayment over a much longer period you can generally make quite an impact on reducing your monthly outgoings. ...
Post Tue Aug 20, 2013 9:41 am
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