Thinking about a 401k loan… good or bad idea?

Loans
1

My credit is a mess… accounts in collections, late payments, the whole thing. I was thinking about taking a loan from my 401k to pay off the collections and other bad debt, then paying back the 401k loan like a debt consolidation plan.

I know I could just pay it off slowly over time, and I can barely afford to do that, but I was hoping this might speed up the process of fixing my credit.

I get that there are risks, but in theory, this could help me get back on track. Would love to hear what others think.

2

Probably not a popular opinion but… I’ve taken three loans from my 401k and I don’t regret it.

One is paid off, and I’ve got 14 payments left on one and 36 left on the last.

The best part is that the interest gets paid back into your own account. So instead of paying a bank, you’re basically paying yourself.

If you can handle the payments, it might be worth considering. I’d run the numbers and compare all your options first.

3

@Wylie
Only works if you don’t switch jobs. If you leave, the whole thing becomes due. Wouldn’t risk it.

4

Honestly, bankruptcy might be your best option.

5

Ellis said:
Honestly, bankruptcy might be your best option.

I’ve thought about that, but my car is in someone else’s name too, and they’re saying it would affect them. So that’s making it complicated.

6

@Bennett
If the car is in their name, it won’t affect them. Legally, it’s theirs. If it’s not in your name alone, you don’t have to include it in bankruptcy.

7

Lennox said:
@Bennett
If the car is in their name, it won’t affect them. Legally, it’s theirs. If it’s not in your name alone, you don’t have to include it in bankruptcy.

It’s in both our names, actually.

8

@Bennett
You can still leave it out of bankruptcy.

9

@Bennett
Maybe sell it to them and keep making the payments. That way, you can file bankruptcy without causing them issues.

10

@Bennett
It won’t affect their credit at all… a quick Google search would’ve told you that.

11

Close those accounts, pay them off with the snowball method, and do not touch your 401k. It’s not worth the risk.

12

Why is your credit score so important right now? A credit score just helps you borrow money, and you’ve already had trouble with debt. Focus on paying it off instead of trying to fix the number.

13

Jules said:
Why is your credit score so important right now? A credit score just helps you borrow money, and you’ve already had trouble with debt. Focus on paying it off instead of trying to fix the number.

Trying to move out soon.

14

@Bennett
Might be worth waiting until your finances are in better shape before taking that step.

15

Please don’t do this… it’s a cycle that’s hard to get out of.

16

We’re actually considering limiting how many loans people can take. Right now, you can take up to four. But if you get laid off with active loans, they’re due immediately. That’s where people get into trouble.

17

I’ve done 401k loans before. If you’re sure your job is stable, it can be okay.

But if you leave your job, the loan turns into a withdrawal, and you get hit with taxes and penalties unless you pay it back fast.

Also, the interest you pay on the loan gets taxed twice—once now and again when you retire. Something to think about.

18

I know people say never touch your 401k, but I took out $18k when I was 32 to get out of a mess, and it worked out for me. I’m 60 now and don’t regret it.

I wouldn’t do it unless you’ve actually changed your spending habits, though.

19

@Lian
That was decades ago, though. The penalties and rules have changed a lot since then. Plus, using a retirement account for debt isn’t great long term.

20

Lennox said:
@Lian
That was decades ago, though. The penalties and rules have changed a lot since then. Plus, using a retirement account for debt isn’t great long term.

Yeah, I had to pay taxes and a penalty, but for me, it was worth it.