The Danger of Borrowing Money From Your Future Self
Timothy (Jun) Lu, Olivia S. Mitchell, Stephen P. Utkus, and Jean A. Young, the authors of the study, found that about 90 percent of those who take out loans manage to repay them—except in the case of those who have outstanding loans when they exit a job. In those instances, about 86 percent of borrowers end up defaulting on their loans. After leaving a company, outstanding loans usually become due as a balloon payment within a short period of time, generally about 60 days. The authors suggest several explanations for the high default rate in such scenarios, including inattention to the loan and lack of knowledge about how these loans work when factoring in a job change. In total the study found that borrowers would [wound?] up with about $6 billion of 401(k) loan defaults each year.