When you are considering borrowing from 401(k) you must know the 401(k) loan basics first. Its biggest benefit is also interestingly its most significant drawback. The very fact that you can borrow funds from your retirement savings to tide over a financial crisis can actually land you in worse financial trouble at a later date if you fail to repay the loan amount.

So, it is a double-edged sword and without knowing the 401(k) loan basics, advantages, and drawbacks, one should not make this decision. Not all 401(k) plan providers will allow you to take out a chunk of your own savings; at the same time, there are many plan providers out there who allow this to happen.

What are the Advantages of Borrowing from Your 401(k) Plan?

• If you go through 401(k) loan basics, you will see that requesting the loan is rather easy and you can get the funds faster. There is no checking of credit history or a lengthy application process. Although plan providers are permitted by regulations to offer such loans, they can limit the amount or repayment terms as they deem fit. Most loan requests can be processed only with a few clicks and you receive a check in a matter of days in complete privacy.
• Secondly, while the regulations state that you must repay the loan amount within 5 years, you are free to finish repayment earlier and there is no penalty for that. You can conduct repayments through payroll deductions. Your statement will show the credits to the loan account, and the balance due, just like any standard bank statement.
• You will not have to pay any costs for taking out your own money for short-term needs. You only have to specify the account from where you wish to borrow. You will, however, lose any positive earning that could have happened through your investments during this time. The good thing is that you do not have to bear losses in case your investments had not paid off.
• When you repay the loan amount this money gets credited to your bank account and portfolio investments. You have to repay slightly more than what you had borrowed and this difference is the “interest” that you pay yourself. The loan will have no effect on your retirement; incidentally, if this interest paid surpasses any lost investment earning, borrowing the loan may actually help to increase your savings.

The biggest shortcomings of the 401(k) loan are that you use money that otherwise would have been working in your benefit. You are missing potential growth opportunities unless the market conditions are bad. While you may be earning interest, it is not high. Secondly, you can default on the payment of loans. For instance, if you quit or get fired from your job, there are plans that force you to repay the due within 60 days. You may ow taxes on this money and even a penalty fee when you are less than 59.5 years of age. So, the bottom line is that you require the 401(k) loan for a secure retirement and anything which can put your savings at risk must be carefully considered. If you find that your only option is to take money out of the 401(k), then borrowing is the only way out. If you have some other option, you should leave these savings untouched.