Buying a car, does it make sense to use 401k loan instead of an auto loan?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
jimmyrules712
Posts: 483
Joined: Thu Jan 06, 2011 11:36 pm

Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by jimmyrules712 » Sun Aug 11, 2019 10:31 am

One of my cars is on it's last leg so I will be buying a new vehicle soon and am contemplating using a 401k loan instead of an auto loan. The amount I need to finance is about $25k. I have enough cash to buy it outright but I will also probably be buying a new house in the next year so I don't want to deplete my cash reserves too much.

I'm looking for a 5 year loan and the best auto loan rate I can find is 3.49% through Penfed (the dealer does not have any special financing that's better). I can do a 401k loan through my employer's 401k. It has a $35 origination fee, $20 annual loan fee, and a 6.5% interest rate which is paid back into my 401k account. My 401k has about $250k in it and I can borrow up to $50k for the loan (but would just do the $25k). I have no other debts besides my mortgage and excellent credit. Current cars are paid off.

My job is very stable. I've been with the same employer for 10 years and don't expect to go anywhere but in the event I did leave I have access to enough cash to pay off the loan through cashing out some other after tax investments.

I don't know how to compare these options? Obviously the 401k loan is a higher rate but since it's paid to my retirement account am I better off going that way?

averagedude
Posts: 674
Joined: Sun May 13, 2018 3:41 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by averagedude » Sun Aug 11, 2019 10:41 am

I believe that successful 401k millionaires follow these principles.
1. They start young.
2. They contribute a high percentage of their income to it or they contribute the maximum allowed.
3. They have a high stock allocation.
4. They never, ever, cash out when changing jobs.
5. They never consider borrowing from their 401k plan.

livesoft
Posts: 67372
Joined: Thu Mar 01, 2007 8:00 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by livesoft » Sun Aug 11, 2019 10:41 am

It seems to me that you would want to hold the 401(k) loan idea in reserve for future home purchase instead of holding your cash in reserve for that.
Wiki This signature message sponsored by sscritic: Learn to fish.

Olemiss540
Posts: 1041
Joined: Fri Aug 18, 2017 8:46 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by Olemiss540 » Sun Aug 11, 2019 10:44 am

Is there an option 4: Consider buying 12k reliable transportation with cash to minimize impact to cash reserves? Also consider you could trim 401k contributions if house purchase was impending to restock some reserves.

401k loans for material (depreciating) asset purchases are a frequently used tool for those that are broke or poor money mangers HISTORICALLY. The wealthy do not tend to jeopardize their investments to purchase such goods instead refraining from the purchase until they are in a position to buy with cash. Mimic the acts of the broke, or the acts of the millionaire next door to reach the goals you are striving for long term.
Last edited by Olemiss540 on Sun Aug 11, 2019 10:47 am, edited 1 time in total.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

Goal33
Posts: 859
Joined: Sun Apr 12, 2015 12:30 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by Goal33 » Sun Aug 11, 2019 10:45 am

livesoft wrote:
Sun Aug 11, 2019 10:41 am
It seems to me that you would want to hold the 401(k) loan idea in reserve for future home purchase instead of holding your cash in reserve for that.
+1. Why complicate things earlier than you have to?
A man with one watch always knows what time it is; a man with two watches is never sure.

bsteiner
Posts: 4197
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by bsteiner » Sun Aug 11, 2019 10:46 am

If you buy the car through PenFed's buying service (which is TrueCar under the PenFed name) they'll only charge you 1.49% interest on the loan.

treadingwater
Posts: 31
Joined: Sun Sep 02, 2018 6:01 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by treadingwater » Sun Aug 11, 2019 10:47 am

Do not borrow from your 401k. You will lose out on the earning potential of the borrowed funds. Keep your discipline and don't touch that money until retirement.

User avatar
JAZZISCOOL
Posts: 13
Joined: Sat May 18, 2019 11:49 am
Location: Colorado - 5,700 ft.

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by JAZZISCOOL » Sun Aug 11, 2019 10:49 am

bsteiner wrote:
Sun Aug 11, 2019 10:46 am
If you buy the car through PenFed's buying service (which is TrueCar under the PenFed name) they'll only charge you 1.49% interest on the loan.
This appears to be a good option.

In general, many savvy investors and financial advisors do not recommend borrowing from a 401(k).

Here is one article that discusses some of the reasons:

https://www.investopedia.com/articles/r ... ns401k.asp
Last edited by JAZZISCOOL on Sun Aug 11, 2019 10:50 am, edited 1 time in total.

livesoft
Posts: 67372
Joined: Thu Mar 01, 2007 8:00 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by livesoft » Sun Aug 11, 2019 10:50 am

treadingwater wrote:
Sun Aug 11, 2019 10:47 am
Do not borrow from your 401k. You will lose out on the earning potential of the borrowed funds. Keep your discipline and don't touch that money until retirement.
If the money in the 401(k) was in bond funds, then the "earning potential" is probably not much more than the 6.5% interest paid back into the 401(k). And one can always rebalance the 401(k) to make it look like the loan was removed only from the bond fund.

Also if the funds in the 401(k) have terrible expense ratios, then the 401(k) loan is a way to reduce the expenses. :twisted:
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
9-5 Suited
Posts: 347
Joined: Thu Jun 23, 2016 12:14 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by 9-5 Suited » Sun Aug 11, 2019 10:54 am

I would challenge a few assumptions if I were in your shoes just to make sure all the options are on the table before taking a 401K loan ...

1. Do you need a $25K car or want a $25K car and would a $15K car meet your need just as well?

2. Do you need a 5 year loan or could you focus enough resources to pay it back sooner at a cheaper rate via traditional financing?

3. Do you need those cash reserves or are you being too protective of them when you really should use them for the car and then find a new way to access cash when/if you need it for a home purchase.

I think you are at risk of framing the situation too narrowly such that you convince yourself a 401K loan is a better option than it is.

User avatar
J G Bankerton
Posts: 1251
Joined: Thu Sep 14, 2017 3:30 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by J G Bankerton » Sun Aug 11, 2019 10:59 am

Olemiss540 wrote:
Sun Aug 11, 2019 10:44 am
Is there an option 4: Consider buying 12k reliable transportation with cash to minimize impact to cash reserves? Also consider you could trim 401k contributions if house purchase was impending to restock some reserves.

401k loans for material (depreciating) asset purchases are a frequently used tool for those that are broke or poor money mangers HISTORICALLY. The wealthy do not tend to jeopardize their investments to purchase such goods instead refraining from the purchase until they are in a position to buy with cash. Mimic the acts of the broke, or the acts of the millionaire next door to reach the goals you are striving for long term.
+1
Borrowing money for a deprecating asset is a guarantied loss going in and coming out, "whip sawed".

cshell2
Posts: 133
Joined: Thu May 09, 2019 10:29 am

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by cshell2 » Sun Aug 11, 2019 11:01 am

I think you're ignoring the fact that your money will not be invested while it's loaned out for a car. That could make the 401K loan way more expensive than the auto loan.

sd323232
Posts: 72
Joined: Thu Jun 21, 2018 4:45 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by sd323232 » Sun Aug 11, 2019 11:03 am

jimmyrules712 wrote:
Sun Aug 11, 2019 10:31 am
One of my cars is on it's last leg so I will be buying a new vehicle soon and am contemplating using a 401k loan instead of an auto loan. The amount I need to finance is about $25k. I have enough cash to buy it outright but I will also probably be buying a new house in the next year so I don't want to deplete my cash reserves too much.

I'm looking for a 5 year loan and the best auto loan rate I can find is 3.49% through Penfed (the dealer does not have any special financing that's better). I can do a 401k loan through my employer's 401k. It has a $35 origination fee, $20 annual loan fee, and a 6.5% interest rate which is paid back into my 401k account. My 401k has about $250k in it and I can borrow up to $50k for the loan (but would just do the $25k). I have no other debts besides my mortgage and excellent credit. Current cars are paid off.

My job is very stable. I've been with the same employer for 10 years and don't expect to go anywhere but in the event I did leave I have access to enough cash to pay off the loan through cashing out some other after tax investments.

I don't know how to compare these options? Obviously the 401k loan is a higher rate but since it's paid to my retirement account am I better off going that way?
Very bad idea. Never take loan on your 401K.

260chrisb
Posts: 282
Joined: Wed Apr 28, 2010 7:26 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by 260chrisb » Sun Aug 11, 2019 11:17 am

You may not be ready to buy a house if you're considering a 401K loan for a car or a standard car loan for 5 years on 25K. Don't do it! Keep contributing, keep getting the match, don't compromise five years of growth potential for a car. You have some cash, buy a less expensive car. Plenty of good cars out there for way less than 25K.

Topic Author
jimmyrules712
Posts: 483
Joined: Thu Jan 06, 2011 11:36 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by jimmyrules712 » Sun Aug 11, 2019 12:46 pm

livesoft wrote:
Sun Aug 11, 2019 10:41 am
It seems to me that you would want to hold the 401(k) loan idea in reserve for future home purchase instead of holding your cash in reserve for that.
What are the reasons why it would be better to use a 401k loan for a house? I'm not disagreeing, I genuinely don't know.

Olemiss540 wrote:
Sun Aug 11, 2019 10:44 am
Is there an option 4: Consider buying 12k reliable transportation with cash to minimize impact to cash reserves? Also consider you could trim 401k contributions if house purchase was impending to restock some reserves.
9-5 Suited wrote:
Sun Aug 11, 2019 10:54 am
1. Do you need a $25K car or want a $25K car and would a $15K car meet your need just as well?
This vehicle is a mini van for our third child on the way. I want it to last until my kids are in or nearly out of highschool so at least 15 years. In my market a used van with 50k miles is only $3k less expensive than a brand new one. Since I intend to keep it for 15 years I firmly believe I'm better off buying new.
260chrisb wrote:
Sun Aug 11, 2019 11:17 am
You may not be ready to buy a house if you're considering a 401K loan for a car or a standard car loan for 5 years on 25K. Don't do it! Keep contributing, keep getting the match, don't compromise five years of growth potential for a car. You have some cash, buy a less expensive car. Plenty of good cars out there for way less than 25K.
I'm in my early thirties with $500k saved in retirement funds. I already max out my 401k and 2 roth IRAs every year and have about $2k left over in funds each month that can go towards a loan. I've just prioritized retirement savings and debt reduction until now so I"m a little cash poor. I'm confident I'm in a good financial position to afford the car. The purchase can't wait until I save for more for it because I have a third kid on the way and my current car needs repairs that cost more than the car is worth.

livesoft
Posts: 67372
Joined: Thu Mar 01, 2007 8:00 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by livesoft » Sun Aug 11, 2019 12:57 pm

jimmyrules712 wrote:
Sun Aug 11, 2019 12:46 pm
What are the reasons why it would be better to use a 401k loan for a house? I'm not disagreeing, I genuinely don't know.
I didn't say it was better. I feel that if you used your cash for the car, then you would probably not dive into the 401(k) anyways. You preserve some contingencies I think. A big car or 401(k) loan would reduce the amount of loan you would qualify for when it came to mortgage time, wouldn't it?
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
J G Bankerton
Posts: 1251
Joined: Thu Sep 14, 2017 3:30 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by J G Bankerton » Sun Aug 11, 2019 1:17 pm

jimmyrules712 wrote:
Sun Aug 11, 2019 12:46 pm
livesoft wrote:
Sun Aug 11, 2019 10:41 am
It seems to me that you would want to hold the 401(k) loan idea in reserve for future home purchase instead of holding your cash in reserve for that.

In my market a used van with 50k miles is only $3k less expensive than a brand new one.
What are the reasons why it would be better to use a 401k loan for a house? I'm not disagreeing, I genuinely don't know.
A home most likely will be an appreciating assist. A car defiantly will not.
$3,000 less for a van with 50,000 than a new one? What does the blue book say. Mini vans do not hold their value.

tim1999
Posts: 3612
Joined: Tue Dec 16, 2008 7:16 am

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by tim1999 » Sun Aug 11, 2019 1:45 pm

cshell2 wrote:
Sun Aug 11, 2019 11:01 am
I think you're ignoring the fact that your money will not be invested while it's loaned out for a car. That could make the 401K loan way more expensive than the auto loan.
Also, at least in the case of my employer and 401k provider (Fidelity), they take the amount of loan out of your account proportionally across all of your fund allocations. In other words, if you held a bond fund or stable value fund, you could not tell them to just take the loan from that and leave your equity funds alone.

02nz
Posts: 2125
Joined: Wed Feb 21, 2018 3:17 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by 02nz » Sun Aug 11, 2019 1:50 pm

tim1999 wrote:
Sun Aug 11, 2019 1:45 pm
cshell2 wrote:
Sun Aug 11, 2019 11:01 am
I think you're ignoring the fact that your money will not be invested while it's loaned out for a car. That could make the 401K loan way more expensive than the auto loan.
Also, at least in the case of my employer and 401k provider (Fidelity), they take the amount of loan out of your account proportionally across all of your fund allocations. In other words, if you held a bond fund or stable value fund, you could not tell them to just take the loan from that and leave your equity funds alone.
But you can adjust AA to compensate. Of course that has limits, e.g., if you're 100% in stocks, then there's no way to compensate.

User avatar
Nate79
Posts: 4795
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by Nate79 » Sun Aug 11, 2019 1:51 pm

I would buy a used car you can actually afford which means paying cash that doesnt in any way impact your future house down payment.

User avatar
9-5 Suited
Posts: 347
Joined: Thu Jun 23, 2016 12:14 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by 9-5 Suited » Sun Aug 11, 2019 2:44 pm

I sense the process of rationalization happening very clearly in this thread whereby a bad idea (taking out a 401K loan to buy a new car) magically becomes a good idea by virtue of a few dubious assumptions about a lack of alternatives. Buying a new car isn’t a better value over the next 15 years than buying and selling a series of reliable used cars, and a 2010 Sienna isn’t $3K less than a new Sienna (or whatever). If you need a 401K loan to buy something, you can’t afford it. Just use your cash to buy a car, take out a small regular loan if needed, pay it off quickly and resave up for a house payment.

You can contort this a million ways to make a bad decision sound smart. I hope you don’t!

User avatar
J G Bankerton
Posts: 1251
Joined: Thu Sep 14, 2017 3:30 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by J G Bankerton » Sun Aug 11, 2019 5:33 pm

OP, when I got out of debt my net worth skyrocketed. I used to throw $15,000, in today's dollars, away every year on interest payments. I now buy VTI with that money, now for even large purchases I can pay cash.
Being in debt is like having strangers own a piece of you.

H-Town
Posts: 1908
Joined: Sun Feb 26, 2017 2:08 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by H-Town » Sun Aug 11, 2019 5:46 pm

jimmyrules712 wrote:
Sun Aug 11, 2019 10:31 am
One of my cars is on it's last leg so I will be buying a new vehicle soon and am contemplating using a 401k loan instead of an auto loan. The amount I need to finance is about $25k. I have enough cash to buy it outright but I will also probably be buying a new house in the next year so I don't want to deplete my cash reserves too much.

I'm looking for a 5 year loan and the best auto loan rate I can find is 3.49% through Penfed (the dealer does not have any special financing that's better). I can do a 401k loan through my employer's 401k. It has a $35 origination fee, $20 annual loan fee, and a 6.5% interest rate which is paid back into my 401k account. My 401k has about $250k in it and I can borrow up to $50k for the loan (but would just do the $25k). I have no other debts besides my mortgage and excellent credit. Current cars are paid off.

My job is very stable. I've been with the same employer for 10 years and don't expect to go anywhere but in the event I did leave I have access to enough cash to pay off the loan through cashing out some other after tax investments.

I don't know how to compare these options? Obviously the 401k loan is a higher rate but since it's paid to my retirement account am I better off going that way?
Take the loan and use extra cash flow each month to pay off your car loan in a year. It'll probably cost you less than $500. The interest from your savings should cover a portion, if not all, of it.

User avatar
Watty
Posts: 16864
Joined: Wed Oct 10, 2007 3:55 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by Watty » Sun Aug 11, 2019 5:58 pm

One thing to check on is if your employer has any restrictions on making 401k contributions when you have a 401k loan.

As I recall before I retired my employer would not allow you to make 401k contributions not only while you had a loan, but for an additional six months after it was paid off.

This would cause you to miss out on the employer 401k match if you took out a 401k loan.

cherijoh
Posts: 6056
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by cherijoh » Sun Aug 11, 2019 6:23 pm

jimmyrules712 wrote:
Sun Aug 11, 2019 12:46 pm
livesoft wrote:
Sun Aug 11, 2019 10:41 am
It seems to me that you would want to hold the 401(k) loan idea in reserve for future home purchase instead of holding your cash in reserve for that.
What are the reasons why it would be better to use a 401k loan for a house? I'm not disagreeing, I genuinely don't know.
Houses don't lose value as soon as you drive them off the lot. If you are currently renting, a home purchase also mitigates the need to pay rent. Therefore it is on par with retirement savings in terms of bettering your financial picture (of course assuming you don't buy too much house). Taking 60 months to pay off a car suggests that you can't really afford the car you are purchasing..

From a practical standpoint, many employers only allow one outstanding loan at a time. You pay back the loan in after-tax dollars and the interest rate will likely be higher than the auto loan. Even though you are "paying back yourself", from a cash flow standpoint, you will likely be making a larger monthly payment for the 401k loan thus impeding your ability to save more money towards a house down payment.

You can throw extra money at a car loan very easily. 401k loans are paid back through payroll withholding. While you may be able to pay off the 401k loan early, I would suspect it is all or nothing - there is unlikely a way to pay and extra hundred bucks this month but just the standard payment next month as you can with a car loan.

If I were you I'd shop around for a better auto loan rate that would allow you to pay off the loan more quickly.

wilked
Posts: 1525
Joined: Thu Mar 24, 2011 1:50 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by wilked » Sun Aug 11, 2019 6:33 pm

Pay for cars with cash. You have cash available. Use it

Worry about the home in a year. Find a way to replenish that 25k

Living Free
Posts: 309
Joined: Thu Jul 19, 2018 7:31 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by Living Free » Sun Aug 11, 2019 8:59 pm

jimmyrules712 wrote:
Sun Aug 11, 2019 12:46 pm


This vehicle is a mini van for our third child on the way. I want it to last until my kids are in or nearly out of highschool so at least 15 years. In my market a used van with 50k miles is only $3k less expensive than a brand new one. Since I intend to keep it for 15 years I firmly believe I'm better off buying new.
I'm surprised by this. I'm able to find quite a few (not like hundreds, but, ya know, several) 2016 or newer toyota sienna or honda odyssey, with sub 60k miles, within 200 miles of me on autotrader for under $18k. Have you considered expanding your geographic area in which you're searching?

Ferdinand2014
Posts: 479
Joined: Mon Dec 17, 2018 6:49 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by Ferdinand2014 » Sun Aug 11, 2019 9:00 pm

jimmyrules712 wrote:
Sun Aug 11, 2019 10:31 am
One of my cars is on it's last leg so I will be buying a new vehicle soon and am contemplating using a 401k loan instead of an auto loan. The amount I need to finance is about $25k. I have enough cash to buy it outright but I will also probably be buying a new house in the next year so I don't want to deplete my cash reserves too much.

I'm looking for a 5 year loan and the best auto loan rate I can find is 3.49% through Penfed (the dealer does not have any special financing that's better). I can do a 401k loan through my employer's 401k. It has a $35 origination fee, $20 annual loan fee, and a 6.5% interest rate which is paid back into my 401k account. My 401k has about $250k in it and I can borrow up to $50k for the loan (but would just do the $25k). I have no other debts besides my mortgage and excellent credit. Current cars are paid off.

My job is very stable. I've been with the same employer for 10 years and don't expect to go anywhere but in the event I did leave I have access to enough cash to pay off the loan through cashing out some other after tax investments.

I don't know how to compare these options? Obviously the 401k loan is a higher rate but since it's paid to my retirement account am I better off going that way?
Eternal advice:

Romans 13:8 Let no debt remain outstanding except the continuing debt to love on another.. Proverbs 22:7 The rich rules over the poor, and the borrower is the slave of the lender.
Last edited by Ferdinand2014 on Sun Aug 11, 2019 9:06 pm, edited 1 time in total.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

Ferdinand2014
Posts: 479
Joined: Mon Dec 17, 2018 6:49 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by Ferdinand2014 » Sun Aug 11, 2019 9:05 pm

J G Bankerton wrote:
Sun Aug 11, 2019 5:33 pm
OP, when I got out of debt my net worth skyrocketed. I used to throw $15,000, in today's dollars, away every year on interest payments. I now buy VTI with that money, now for even large purchases I can pay cash.
Being in debt is like having strangers own a piece of you.
+1
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

knowledge
Posts: 175
Joined: Wed Mar 02, 2011 5:44 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by knowledge » Mon Aug 12, 2019 9:11 am

I too believed that 401k loans were straight foolish, full stop. But being in a (high-class) pickle where I didn't want to actualize capital gains to fund my new home purchase, I ran some due diligence on 401k loans. I ended up taking out a $50k loan, which was very simple (no underwriting when it's your own money!), and am happy that I researched that option. At the moment, I have the balance of my loan sitting in my savings account, and am wondering if I should pay it over the remaining 4.8 years or just all at once - there doesn't seem to be an inbetween option, you either pay the scheduled amount, or all at once.

That said, I wouldn't use a 401k loan for a car purchase.

User avatar
CyclingDuo
Posts: 2431
Joined: Fri Jan 06, 2017 9:07 am

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by CyclingDuo » Mon Aug 12, 2019 9:36 am

jimmyrules712 wrote:
Sun Aug 11, 2019 10:31 am
One of my cars is on it's last leg so I will be buying a new vehicle soon and am contemplating using a 401k loan instead of an auto loan. The amount I need to finance is about $25k. I have enough cash to buy it outright but I will also probably be buying a new house in the next year so I don't want to deplete my cash reserves too much.

I'm looking for a 5 year loan and the best auto loan rate I can find is 3.49% through Penfed (the dealer does not have any special financing that's better). I can do a 401k loan through my employer's 401k. It has a $35 origination fee, $20 annual loan fee, and a 6.5% interest rate which is paid back into my 401k account. My 401k has about $250k in it and I can borrow up to $50k for the loan (but would just do the $25k). I have no other debts besides my mortgage and excellent credit. Current cars are paid off.

My job is very stable. I've been with the same employer for 10 years and don't expect to go anywhere but in the event I did leave I have access to enough cash to pay off the loan through cashing out some other after tax investments.

I don't know how to compare these options? Obviously the 401k loan is a higher rate but since it's paid to my retirement account am I better off going that way?
If you cannot afford to pay cash for a vehicle (new or used), you cannot afford it. We inherited that financial acumen from our parents and stick by it.

CyclingDuo (we've always paid cash for our vehicles over the past 30+ years)
"Everywhere is within walking distance if you have the time." ~ Steven Wright

Planner01
Posts: 36
Joined: Mon Dec 26, 2016 2:44 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by Planner01 » Mon Aug 12, 2019 10:11 am

Use your cash to buy the car and delay the purchase of the house until you can replenish the savings.
Or if you must buy the house soon, then take the car loan and pay it off as fast as possible. Don’t use a 401k loan, you will miss out on the earnings which will be a lot more than the interest you could pay. Not to mention some employers restrict contributions for 6 months after taking a loan. A bad idea altogether.

fundseeker
Posts: 762
Joined: Mon Dec 24, 2007 9:02 am

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by fundseeker » Tue Aug 13, 2019 6:15 am

This is a tough bunch, isn't it? You've been doing great and are well disciplined, but I have to agree that resorting to a 401k loan is a bad idea. Maybe it's time to cut back on current savings and get a van for the family.

I highly recommend a Honda Odyssey. We have had our 2011 EX for almost nine years and 123,000 miles, and it feels like it could go another 100k, but we are about to go to an SUV because the kids are gone. Also, Honda is offering 1.9% now to get rid of their 2019 Odysseys, and if you negotiate well on the last day of the month, you may come out pretty good. Sometime you do need to spend some money for fun, just not from your 401k. :happy

basspond
Posts: 1220
Joined: Wed Nov 27, 2013 4:01 am

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by basspond » Tue Aug 13, 2019 7:04 am

Never take out a 401k loan. I have never understood the logic that you are paying yourself back. The truth is your interest payments will be part of everyone’s cash balance return in the plan, which you would be getting even if you didn’t take out a loan.

If you are worried about draining your reserves, take out a loan outside of the 401 but pay it off in under a year. Doing that will be a good exercise to determine if you are ready to buy a house.

Admiral
Posts: 2202
Joined: Mon Oct 27, 2014 12:35 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by Admiral » Tue Aug 13, 2019 9:00 am

jimmyrules712 wrote:
Sun Aug 11, 2019 12:46 pm
livesoft wrote:
Sun Aug 11, 2019 10:41 am
It seems to me that you would want to hold the 401(k) loan idea in reserve for future home purchase instead of holding your cash in reserve for that.
What are the reasons why it would be better to use a 401k loan for a house? I'm not disagreeing, I genuinely don't know.

Olemiss540 wrote:
Sun Aug 11, 2019 10:44 am
Is there an option 4: Consider buying 12k reliable transportation with cash to minimize impact to cash reserves? Also consider you could trim 401k contributions if house purchase was impending to restock some reserves.
9-5 Suited wrote:
Sun Aug 11, 2019 10:54 am
1. Do you need a $25K car or want a $25K car and would a $15K car meet your need just as well?
This vehicle is a mini van for our third child on the way. I want it to last until my kids are in or nearly out of highschool so at least 15 years. In my market a used van with 50k miles is only $3k less expensive than a brand new one. Since I intend to keep it for 15 years I firmly believe I'm better off buying new.
260chrisb wrote:
Sun Aug 11, 2019 11:17 am
You may not be ready to buy a house if you're considering a 401K loan for a car or a standard car loan for 5 years on 25K. Don't do it! Keep contributing, keep getting the match, don't compromise five years of growth potential for a car. You have some cash, buy a less expensive car. Plenty of good cars out there for way less than 25K.
I'm in my early thirties with $500k saved in retirement funds. I already max out my 401k and 2 roth IRAs every year and have about $2k left over in funds each month that can go towards a loan. I've just prioritized retirement savings and debt reduction until now so I"m a little cash poor. I'm confident I'm in a good financial position to afford the car. The purchase can't wait until I save for more for it because I have a third kid on the way and my current car needs repairs that cost more than the car is worth.
If you have $2k in spare cash each month, save for 6 mos, put down $12k, and get a loan for the rest. The interest will be minimal. And, assuming you still have an extra $1.5k left even after making the car loan payment, save up a few more months or a year and pay off the loan. Seems simple to me, assuming this car purchase can be put off for a bit (as in the child is not due in a month). Alternatively, you could skip a few months of retirement contribs and use the money for a downpayment. This is not optimal of course but it's better than the loan, and you seem to be saving plenty.

EDIT: another option is a 0% credit card transfer loan, as long as you can pay it back by the end of the zero interest period. You could use that for a 10-15k downpayment and take a loan for the rest. $2k per month would/should allow you to pay off both quickly.

ERISA Stone
Posts: 1573
Joined: Tue Jun 24, 2014 8:54 am

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by ERISA Stone » Tue Aug 13, 2019 9:45 am

If it were me, I would ignore people who say not to borrow from your 401k without considering your current situation. A 401k with a loan option can be a valuable thing. It should be considered as a funding vehicle along with all of your other options.

My rule of thumb is if you know you are going to borrow the money regardless, consider the 401k option against all other options, as any prudent individual would do. Think of some way to account for the average rate of return you will lose and add that to your analysis. As someone else mentioned, check to see if you are still able to make 401k contributions while having an outstanding loan.

If you are considering taking the loan for something you wouldn't otherwise purchase, don't consider the 401k. It's that simple for me.

Having said that, I don't know how borrowing from the 401k at 6.5% is going to provide you a better deal than the 3.49%.

Also, consider that you can pay cash for the car and refinance later if you need to.

Admiral
Posts: 2202
Joined: Mon Oct 27, 2014 12:35 pm

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by Admiral » Tue Aug 13, 2019 9:53 am

ERISA Stone wrote:
Tue Aug 13, 2019 9:45 am
If it were me, I would ignore people who say not to borrow from your 401k without considering your current situation. A 401k with a loan option can be a valuable thing. It should be considered as a funding vehicle along with all of your other options.

My rule of thumb is if you know you are going to borrow the money regardless, consider the 401k option against all other options, as any prudent individual would do. Think of some way to account for the average rate of return you will lose and add that to your analysis. As someone else mentioned, check to see if you are still able to make 401k contributions while having an outstanding loan.

If you are considering taking the loan for something you wouldn't otherwise purchase, don't consider the 401k. It's that simple for me.

Having said that, I don't know how borrowing from the 401k at 6.5% is going to provide you a better deal than the 3.49%.

Also, consider that you can pay cash for the car and refinance later if you need to.
Because the interest goes into your 401k, not to a lender. That said, I would never do it. I'd sooner take a home equity loan or HELOC.

User avatar
dm200
Posts: 21293
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Buying a car, does it make sense to use 401k loan instead of an auto loan?

Post by dm200 » Tue Aug 13, 2019 10:04 am

jimmyrules712 wrote:
Sun Aug 11, 2019 10:31 am
One of my cars is on it's last leg so I will be buying a new vehicle soon and am contemplating using a 401k loan instead of an auto loan. The amount I need to finance is about $25k. I have enough cash to buy it outright but I will also probably be buying a new house in the next year so I don't want to deplete my cash reserves too much.
I'm looking for a 5 year loan and the best auto loan rate I can find is 3.49% through Penfed (the dealer does not have any special financing that's better). I can do a 401k loan through my employer's 401k. It has a $35 origination fee, $20 annual loan fee, and a 6.5% interest rate which is paid back into my 401k account. My 401k has about $250k in it and I can borrow up to $50k for the loan (but would just do the $25k). I have no other debts besides my mortgage and excellent credit. Current cars are paid off.
My job is very stable. I've been with the same employer for 10 years and don't expect to go anywhere but in the event I did leave I have access to enough cash to pay off the loan through cashing out some other after tax investments.
I don't know how to compare these options? Obviously the 401k loan is a higher rate but since it's paid to my retirement account am I better off going that way?
No - go with the auto loan. A 401k "loan" liquidates the amount of the "loan" and buys back investments as you pay back.

Is this a new car to be financed? if so, I believe I hear radio ads all the time from PenFed with rates lower than this.

Post Reply