A 401(k) loan is a financial solution in the case of an emergency. Its interest rate is higher than the prime rate only by a point or two. According to the law, one can borrow up to 50% of the amount available in their 401(k) plan as a loan. In accordance with a number of financial experts, borrowing loan or money from this type of loan amount refers to negligence of the retirement plan.
Unlike other loan types, it has a number of merits and demerits. This article will take you through a few benefits of taking a 401(k) loan:
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1. It can be utilized as the retirement plan
Whenever in financial constraints, you can borrow money from the 401(k) plan, but it will retain its own position in the investment of the portfolio as soon as you repay the total loan amount. After repaying the entire amount, the amount available in the 401(k) account is higher because of the interest paid along with the principal amount. This says that it doesn’t hamper the account balance. Instead, some amount will be added to it as the interest. Each time you take a 401(k) loan and repay it, the balance in your account will increase to some extent. This amount can be utilized as a retirement plan in the future.
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2. It offers an effective cost advantage
Whenever in need, you can opt for liquid cash by taking a 401(k) loan. It will not charge any kind of administration and origination fee, and all you have to do is mention the 401(k) account that you want to take a loan from. You have to mention the specific time you will need to repay the loan amount along with the interest. The positive earning of that account will be lost for that particular time period. This means it is important to try and repay the loan amount as soon as possible to enjoy the positive earnings. In addition, if any loss affects the investment during the loan tenure, you don’t have to worry about it as it will get neglected automatically.
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3. Flexible repayment options
This is the most prominent reason for people inclining toward taking 401(k) loans. As per the rules and regulations, no matter how much amount you borrow, a maximum 5 years term-period is offered to repay the loan. During this time period, you will not get any positive earnings. As it comes with the prepayment facility, you can repay the loan amount whenever you want, without any penalty of the prepayment. As soon as you have repaid the whole loan amount, you will be eligible to enjoy the positive earnings once again. The only thing you have to keep in mind is that it accepts the repayment of loan via payroll deductions, probably after-tax dollars. This is because even the fund is not pre-taxable.
