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Mortgaging the Future; a Growing Trend

Submitted by Jay Garcilazo on July 29, 2009 – 10:54 pmOne Comment

Out of the current financial turmoil a risky trend is emerging. 401K loans which are touted as an easy and low risk way to raise some cash when times are rough are not so risk free. With pay scales stagnant and cost of living on the rise, 1 in 5 to nearly a quarter of 401K holders are leveraging their retirements. In only two years the amount in these loans outstanding went from under 10 billion to just shy of 50 billion dollars. The basic workings of the 401K loans are as follows. You go to your employer and fill out the paperwork; there is no credit check because the money is already yours. You can borrow up to half of the account total with a cap of 50,000 dollars, usually at 5-6% interest. The payment schedule is generally for five years with the payments being automatically deducted from your paychecks. It is true that a loan of this type can be a good way to borrow from yourself during financial hardships, or to alleviate high interest credit card payments, and yes the interest paid is put into your account, but there are still some serious issues to consider before jumping in.

One thing to keep in mind before borrowing from your 401K is that the amount borrowed will not be growing until it is paid off, as well as many plans not allowing you to make any new contributions until the debt is repaid. Also your paychecks will be smaller for up to five years. Leaving or losing your job will result in having to pay back the full loan within 30 to 90 days depending on the plan. Failure to repay within this amount of time causes the loan to be considered a cash out with all of the taxes, fees, and penalties that go along with it. If you are faced with an emergency or need to pay off some high interest credit card debt this may be for you. Just be sure to research all of your options, in today’s job market the risk of layoffs loom large. Please consider the effects this may have on your golden years, after all you do want to be able to buy that Lincoln Continental, and condo in South Florida when you reach retirement; don’t you?

One Comment »

  • Mike says:

    This is not a good trend at all. I’ll gladly pay you Tuesday for a hamburger today

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