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Home Equity Loan - Still a Better Idea Than a 401(K)
Loan
Anyone who borrows money is always looking for the cheapest
source of funding. That makes sense; no one wants to pay more in
interest than is absolutely necessary. And anyone with a sizeable
amount of debt, such as credit card debt or a student loan, would
be wise to consolidate their debt with a lower interest loan. One
source of such a loan is a 401(K) account, which many consumers
may have through their employer. Since the interest rate on
Federal student loans rose on July 1, many students who missed
that deadline may be wondering if consolidating through a 401(K)
loan is a good alternative. Is it?
In a previous article, we have outlined several reasons why
borrowing against a 401(K) account may be less favorable than
using a home equity loan instead. The reasons include the fact
that the interest on a 401(K) loan is not tax deductible, and
that the borrower loses the ability for his or her investment to
compound over time. If you have borrowed the money, it can't earn
interest and the cost over twenty or thirty years could be dear.
In addition to those, there are other reasons why a home equity
loan would be a better source of consolidation funds.
The 401(K) loan is tempting. There is no credit check, the
interest rate is usually favorable, and you are paying the
interest back to yourself. The additional disadvantages are
considerable, though. The money you borrow from your retirement
account was money invested before taxes. The money you pay back
is after-tax money, effectively increasing the amount that has to
be paid back. Worse, should you lose your job, the 401(K) loan
must be paid back immediately, in full. Should this not be
possible, the loan is treated as a distribution, requiring the
payment of a 10% penalty in addition to state and Federal taxes.
With the job market still rather volatile, the additional risk of
borrowing against a retirement account is substantial.
Borrowing against a tax-deferred retirement fund is rarely a
good debt consolidation option. The tax disadvantages, the threat
of penalties and immediate repayment and loss of compounding
generally make such a loan a bad idea. Those with existing
student loans should probably keep them; the interest is tax
deductible and the rate is still lower than with most other
consumer loans. For most anyone else, a home equity loan would be
a better choice, offering deductible interest, fewer risks, and a
fixed repayment schedule. Anyone considering a consolidation loan
should consider all of these options carefully, as the cost of
choosing poorly could be substantial.
©Copyright 2005 by Retro Marketing. Charles Essmeier is
the owner of Retro Marketing, a firm devoted to informational
Websites, including End-Your-Debt.com, a Website devoted to
debt
consolidation and credit counseling information and
HomeEquityHelp.net, a site
devoted to information on mortgages and home equity
loans.
MORE RESOURCES updated Thu. June / 08 / 2023
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