Take a 401k Loan?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
kwarden13
Posts: 154
Joined: Sat May 13, 2017 3:34 pm

Take a 401k Loan?

Post by kwarden13 » Wed Jan 17, 2018 2:31 pm

I am debating taking a 401k loan to pay off some debt in order to raise my credit score. In November, I didn't have much debt and my credit score was about 750. However, I had a bad investment choice and ended up $65k in debt. I have paid it down to about $40k right now (holiday bonus) and it is all on 0% interest cards until Jan 2019. I could probably pay off by then with little problem.

Now my spouse and I are looking to refinance the house to drop PMI. The mortgage company said she could be on the loan by herself since my credit has tanked to about 600 due to the debt. In addition, we may need $5-7k in order to hit the 80% LTV to drop PMI.

Should I take out a 401k loan to bring my score up? If I paid off $20k, my credit score would go back up to the 700s and I could be on the loan. I have $90k in my 401k, am 29 years old, and max it out. If I take out the loan, I can still max out my 401k. Also, never leaving my job and very low risk of layoff. And I would target to pay back over 24-36 months while still maxing out my 401k.

User avatar
djpeteski
Posts: 547
Joined: Fri Mar 31, 2017 9:07 am

Re: Take a 401k Loan?

Post by djpeteski » Wed Jan 17, 2018 3:24 pm

kwarden13 wrote:
Wed Jan 17, 2018 2:31 pm
If I paid off $20k, my credit score would go back up to the 700s and I could be on the loan.
I find that highly unlikely that your credit could improve that quickly with simply paying off a single debt. You said you could have it paid off in Jan 19, that is only a year away. Do that. Your credit score might have been in the 700's prior to assuming these debts, it does not mean that your score will return to that level once they are gone within a year.

You seem frightfully comfortable with debt. If it was me, I would quit maxing out the 401K and perhaps do enough to get the match, but that is all. Pay down these CC's as if your house was on fire. Make them go away ASAP. The fortunate thing is you seem to have a great income for someone so young.

While I agree there is some good debt and bad debt, I would classify a 401k loan as one of the worst kinds of debt available, so no I would not take a 401K loan.

With debt, it is easy to make optimistic plans for the future, and as long as everything works out we are fine. However if bad things do happen the leverage increases the pain of our decisions. You could very well find yourself paying 40% interest on that 401K loan to the IRS. The circumstances that cause that to occur are somewhat common.

Bite the bullet and pay off these credit cards ASAP.

User avatar
BL
Posts: 8016
Joined: Sun Mar 01, 2009 2:28 pm

Re: Take a 401k Loan?

Post by BL » Wed Jan 17, 2018 3:43 pm

djpeteski wrote:
Wed Jan 17, 2018 3:24 pm
kwarden13 wrote:
Wed Jan 17, 2018 2:31 pm
If I paid off $20k, my credit score would go back up to the 700s and I could be on the loan.
I find that highly unlikely that your credit could improve that quickly with simply paying off a single debt. You said you could have it paid off in Jan 19, that is only a year away. Do that. Your credit score might have been in the 700's prior to assuming these debts, it does not mean that your score will return to that level once they are gone within a year.

You seem frightfully comfortable with debt. If it was me, I would quit maxing out the 401K and perhaps do enough to get the match, but that is all. Pay down these CC's as if your house was on fire. Make them go away ASAP. The fortunate thing is you seem to have a great income for someone so young.

While I agree there is some good debt and bad debt, I would classify a 401k loan as one of the worst kinds of debt available, so no I would not take a 401K loan.

With debt, it is easy to make optimistic plans for the future, and as long as everything works out we are fine. However if bad things do happen the leverage increases the pain of our decisions. You could very well find yourself paying 40% interest on that 401K loan to the IRS. The circumstances that cause that to occur are somewhat common.

Bite the bullet and pay off these credit cards ASAP.
+1
There really is no shortcut. Cut expenditures to the bone and pay off quickly!

We all might learn something from your misfortune if you share what happened. My only guess is that you used leverage in investing, and then didn't have the cash to back it up.

kwarden13
Posts: 154
Joined: Sat May 13, 2017 3:34 pm

Re: Take a 401k Loan?

Post by kwarden13 » Wed Jan 17, 2018 3:46 pm

djpeteski wrote:
Wed Jan 17, 2018 3:24 pm
kwarden13 wrote:
Wed Jan 17, 2018 2:31 pm
If I paid off $20k, my credit score would go back up to the 700s and I could be on the loan.
I find that highly unlikely that your credit could improve that quickly with simply paying off a single debt. You said you could have it paid off in Jan 19, that is only a year away. Do that. Your credit score might have been in the 700's prior to assuming these debts, it does not mean that your score will return to that level once they are gone within a year.

You seem frightfully comfortable with debt. If it was me, I would quit maxing out the 401K and perhaps do enough to get the match, but that is all. Pay down these CC's as if your house was on fire. Make them go away ASAP. The fortunate thing is you seem to have a great income for someone so young.

While I agree there is some good debt and bad debt, I would classify a 401k loan as one of the worst kinds of debt available, so no I would not take a 401K loan.

With debt, it is easy to make optimistic plans for the future, and as long as everything works out we are fine. However if bad things do happen the leverage increases the pain of our decisions. You could very well find yourself paying 40% interest on that 401K loan to the IRS. The circumstances that cause that to occur are somewhat common.

Bite the bullet and pay off these credit cards ASAP.
Thank you for the advice! Not comfortable with the debt, but in a high tax bracket so want any deduction I can get. When I said it would go up to the 700s, that is what it shows on Credit Karma's credit simulator. Basically, all the debt hit at one time, so the utilization of my credit cards is about 45% which is showing why it has impacted so much. Other then that no negative remarks.

I guess I just feel bad about not being on the mortgage loan if we refinance. We would wait to refinance however, rates are only going up and dropping PMI frees up another $200 a month.

kwarden13
Posts: 154
Joined: Sat May 13, 2017 3:34 pm

Re: Take a 401k Loan?

Post by kwarden13 » Wed Jan 17, 2018 3:48 pm

BL wrote:
Wed Jan 17, 2018 3:43 pm
We all might learn something from your misfortune if you share what happened. My only guess is that you used leverage in investing, and then didn't have the cash to back it up.
Actually, not really quite investing, just easier for me to cope with the lost money. Not willing to share as its very personal.

N10sive
Posts: 543
Joined: Thu May 05, 2016 6:22 pm

Re: Take a 401k Loan?

Post by N10sive » Wed Jan 17, 2018 3:58 pm

Its interesting your credit score is 600. I am currently getting out of debt and have similar utilization and my credit was 730 before I paid off a student loan. Now its 700. I expect it to go back to 720 in a month or two.

I would just keep the 0% credit cards because the 401k youll end up paying fees etc. and youll most likely lose more money being out of the market for 2 years or 3 however long it takes to payback.

One aspect is your credit to limit ratio on each card. If you have any that are within 10% of the limit try to pay those down first. That will help a little in bringing your score up.

kwarden13
Posts: 154
Joined: Sat May 13, 2017 3:34 pm

Re: Take a 401k Loan?

Post by kwarden13 » Wed Jan 17, 2018 4:13 pm

N10sive wrote:
Wed Jan 17, 2018 3:58 pm
Its interesting your credit score is 600. I am currently getting out of debt and have similar utilization and my credit was 730 before I paid off a student loan. Now its 700. I expect it to go back to 720 in a month or two.

I would just keep the 0% credit cards because the 401k youll end up paying fees etc. and youll most likely lose more money being out of the market for 2 years or 3 however long it takes to payback.

One aspect is your credit to limit ratio on each card. If you have any that are within 10% of the limit try to pay those down first. That will help a little in bringing your score up.
Yea, I maxed out 2 cards totaling $40k rather than spreading it out. Had I thought about the impact, I would have spread it out more. I believe that is causing the large drop. I really hate how they calculate it since I have plenty more credit available and have never been late or anything.

The 401k fee is $50 and the interest you are paying to yourself.

TheHouse7
Posts: 290
Joined: Fri Jan 13, 2017 2:40 am

Re: Take a 401k Loan?

Post by TheHouse7 » Wed Jan 17, 2018 4:34 pm

kwarden13 wrote:
Wed Jan 17, 2018 2:31 pm
The mortgage company said she could be on the loan by herself since my credit has tanked to about 600 due to the debt.
Please let your wife get the refinance with a higher credit score. Does she make enough to qualify for the loan by herself?

Otherwise stick with paying off the credit cards, then look at refinance next year.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

delamer
Posts: 4807
Joined: Tue Feb 08, 2011 6:13 pm

Re: Take a 401k Loan?

Post by delamer » Wed Jan 17, 2018 4:44 pm

TheHouse7 wrote:
Wed Jan 17, 2018 4:34 pm
kwarden13 wrote:
Wed Jan 17, 2018 2:31 pm
The mortgage company said she could be on the loan by herself since my credit has tanked to about 600 due to the debt.
Please let your wife get the refinance with a higher credit score. Does she make enough to qualify for the loan by herself?

Otherwise stick with paying off the credit cards, then look at refinance next year.
If your wife makes enough money to get the mortgage on her own, it seems that you should have the liquidity to pay off the credit cards pretty quickly by cutting expenses without taking out the 401(k) loan.

Don’t take 20%+ out of your 401(k); “targeting”to pay off the loan in a couple years is no guarantee and is a drag on your return.

kwarden13
Posts: 154
Joined: Sat May 13, 2017 3:34 pm

Re: Take a 401k Loan?

Post by kwarden13 » Wed Jan 17, 2018 4:53 pm

delamer wrote:
Wed Jan 17, 2018 4:44 pm
If your wife makes enough money to get the mortgage on her own, it seems that you should have the liquidity to pay off the credit cards pretty quickly by cutting expenses without taking out the 401(k) loan.

Don’t take 20%+ out of your 401(k); “targeting”to pay off the loan in a couple years is no guarantee and is a drag on your return.
She makes about $90k and also maxes out her 401k. Take home is about $1700 a paycheck after taxes, pension, 401k, etc.. My take home is about $2300 a paycheck. Until September we were paying student loans and now have this debt problem. Our mortgage is taking up the bulk of our money- at $2875 (20 year loan, $360k house cheapest in area) right now due to an escrow shortage of $250 and taxes went up $300 a month. That is why we are looking to refinance. We are both pretty young so haven't had much time to save up and I have been only making over $100k for 2 years. I am paying about $2000-2500 a month on the debt currently - an entire paycheck.

Basically was debt free for 2 months and then this $65k debt hit :( Something always happens it seems.

kwarden13
Posts: 154
Joined: Sat May 13, 2017 3:34 pm

Re: Take a 401k Loan?

Post by kwarden13 » Wed Jan 17, 2018 4:56 pm

TheHouse7 wrote:
Wed Jan 17, 2018 4:34 pm
kwarden13 wrote:
Wed Jan 17, 2018 2:31 pm
The mortgage company said she could be on the loan by herself since my credit has tanked to about 600 due to the debt.
Please let your wife get the refinance with a higher credit score. Does she make enough to qualify for the loan by herself?

Otherwise stick with paying off the credit cards, then look at refinance next year.
Yes they said she could qualify. She makes $90k a year and the house was $360k.

Billionaire
Posts: 299
Joined: Sat Jan 04, 2014 3:05 pm

Re: Take a 401k Loan?

Post by Billionaire » Wed Jan 17, 2018 5:07 pm

That's a heck of a bad investment. You just didn't lose money, you are in debt over it. I would just pay it off by Jan 2019 and then reconsider refinancing.

TheHouse7
Posts: 290
Joined: Fri Jan 13, 2017 2:40 am

Re: Take a 401k Loan?

Post by TheHouse7 » Wed Jan 17, 2018 5:10 pm

kwarden13 wrote:
Wed Jan 17, 2018 4:56 pm
TheHouse7 wrote:
Wed Jan 17, 2018 4:34 pm
kwarden13 wrote:
Wed Jan 17, 2018 2:31 pm
The mortgage company said she could be on the loan by herself since my credit has tanked to about 600 due to the debt.
Please let your wife get the refinance with a higher credit score. Does she make enough to qualify for the loan by herself?

Otherwise stick with paying off the credit cards, then look at refinance next year.
Yes they said she could qualify. She makes $90k a year and the house was $360k.
Sounds like you two are killing it, lock-in the best rate you can get with her credit score. Clean up the credit cards ASAP.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

User avatar
sunny_socal
Posts: 1516
Joined: Tue Mar 24, 2015 4:22 pm

Re: Take a 401k Loan?

Post by sunny_socal » Wed Jan 17, 2018 5:18 pm

Get more credit cards. Your Debt:Ceiling ratio matters more when trying to increase your FICO score than paying off those 0% cards.

But don't incur any more CC debt at this point.

basspond
Posts: 1010
Joined: Wed Nov 27, 2013 4:01 am

Re: Take a 401k Loan?

Post by basspond » Wed Jan 17, 2018 5:21 pm

You can't borrow to get yourself out of debt, especially with a 401k loan, too much risk. I am afraid if you borrow now to relieve a temporary setback, it will be just as easy for you to do the same thing further down the road. Feel the hurt and learn to be more wise in your spending and financial decisions. I have been there, it hurts but in the long run it set me on the path to FI.

kwarden13
Posts: 154
Joined: Sat May 13, 2017 3:34 pm

Re: Take a 401k Loan?

Post by kwarden13 » Wed Jan 17, 2018 5:23 pm

sunny_socal wrote:
Wed Jan 17, 2018 5:18 pm
Get more credit cards. Your Debt:Ceiling ratio matters more when trying to increase your FICO score than paying off those 0% cards.

But don't incur any more CC debt at this point.
I have other cards with nothing on them, however, they are not at 0%. I could balance transfer but that cost more money. Any other thoughts on how to 'split up' the debt across cards

delamer
Posts: 4807
Joined: Tue Feb 08, 2011 6:13 pm

Re: Take a 401k Loan?

Post by delamer » Wed Jan 17, 2018 5:26 pm

kwarden13 wrote:
Wed Jan 17, 2018 4:53 pm
delamer wrote:
Wed Jan 17, 2018 4:44 pm
If your wife makes enough money to get the mortgage on her own, it seems that you should have the liquidity to pay off the credit cards pretty quickly by cutting expenses without taking out the 401(k) loan.

Don’t take 20%+ out of your 401(k); “targeting”to pay off the loan in a couple years is no guarantee and is a drag on your return.
She makes about $90k and also maxes out her 401k. Take home is about $1700 a paycheck after taxes, pension, 401k, etc.. My take home is about $2300 a paycheck. Until September we were paying student loans and now have this debt problem. Our mortgage is taking up the bulk of our money- at $2875 (20 year loan, $360k house cheapest in area) right now due to an escrow shortage of $250 and taxes went up $300 a month. That is why we are looking to refinance. We are both pretty young so haven't had much time to save up and I have been only making over $100k for 2 years. I am paying about $2000-2500 a month on the debt currently - an entire paycheck.

Basically was debt free for 2 months and then this $65k debt hit :( Something always happens it seems.

How often are you both paid? If it is biweekly, then your monthly take home is at least $8000/per month (with an extra or two check some months). That leaves you over $5,000 per month for non-mortgage expenses. Seems that putting $3,000/month toward your $40,000 debt should be pretty easy, unless you have car loans or some other costly debt or expenses.

All that that, given your income, this is a short-term problem. Get the new mortgage through your wife only, and pay off your other loan as soon as you can.

kwarden13
Posts: 154
Joined: Sat May 13, 2017 3:34 pm

Re: Take a 401k Loan?

Post by kwarden13 » Wed Jan 17, 2018 5:31 pm

delamer wrote:
Wed Jan 17, 2018 5:26 pm
kwarden13 wrote:
Wed Jan 17, 2018 4:53 pm
delamer wrote:
Wed Jan 17, 2018 4:44 pm
If your wife makes enough money to get the mortgage on her own, it seems that you should have the liquidity to pay off the credit cards pretty quickly by cutting expenses without taking out the 401(k) loan.

Don’t take 20%+ out of your 401(k); “targeting”to pay off the loan in a couple years is no guarantee and is a drag on your return.
She makes about $90k and also maxes out her 401k. Take home is about $1700 a paycheck after taxes, pension, 401k, etc.. My take home is about $2300 a paycheck. Until September we were paying student loans and now have this debt problem. Our mortgage is taking up the bulk of our money- at $2875 (20 year loan, $360k house cheapest in area) right now due to an escrow shortage of $250 and taxes went up $300 a month. That is why we are looking to refinance. We are both pretty young so haven't had much time to save up and I have been only making over $100k for 2 years. I am paying about $2000-2500 a month on the debt currently - an entire paycheck.

Basically was debt free for 2 months and then this $65k debt hit :( Something always happens it seems.

How often are you both paid? If it is biweekly, then your monthly take home is at least $8000/per month (with an extra or two check some months). That leaves you over $5,000 per month for non-mortgage expenses. Seems that putting $3,000/month toward your $40,000 debt should be pretty easy, unless you have car loans or some other costly debt or expenses.

All that that, given your income, this is a short-term problem. Get the new mortgage through your wife only, and pay off your other loan as soon as you can.
Yea our take home is great, but we both have newish cars and car loans ($600 for both) - but keeping them 10+ years. So once paid in 2-3 years we will have much more money. Also, we sort of split stuff 50/50 and don't have a joint account. So she is not contributing to my debt out of her pay and we each for now pay our own items such as cars.

N10sive
Posts: 543
Joined: Thu May 05, 2016 6:22 pm

Re: Take a 401k Loan?

Post by N10sive » Wed Jan 17, 2018 5:38 pm

kwarden13 wrote:
Wed Jan 17, 2018 5:31 pm
Yea our take home is great, but we both have newish cars and car loans - but keeping them 10+ years. So once paid in 2-3 years we will have much more money. Also, we sort of split stuff 50/50 and don't have a joint account. So she is not contributing to my debt out of her pay and we each for now pay our own items such as cars.
After knowing this I now understand your credit score. I would still just pay the 0% credit cards. That is your best route.

If you wanted to spread out your debt on your credit cards you have the 2-4% balance transfer fee isn't that much. But I imagine on say a 20k cc with 0% your current minimum payments are only 300-400 dollars. Like I said before work on one that is closer to the credit limit and pay that down while paying minimum on the other. With even 2500 a month going to cc debt youll be done with this soon.

Other things since you say you pay for things seperately, how about car insurance? Its cheaper usually to bundle it. Cell phones? etc etc. I bet you can find a lot of savings if you try hard enough. Or eat a lot of cup of noodles :happy

kwarden13
Posts: 154
Joined: Sat May 13, 2017 3:34 pm

Re: Take a 401k Loan?

Post by kwarden13 » Wed Jan 17, 2018 5:49 pm

N10sive wrote:
Wed Jan 17, 2018 5:38 pm
kwarden13 wrote:
Wed Jan 17, 2018 5:31 pm
Yea our take home is great, but we both have newish cars and car loans - but keeping them 10+ years. So once paid in 2-3 years we will have much more money. Also, we sort of split stuff 50/50 and don't have a joint account. So she is not contributing to my debt out of her pay and we each for now pay our own items such as cars.
After knowing this I now understand your credit score. I would still just pay the 0% credit cards. That is your best route.

If you wanted to spread out your debt on your credit cards you have the 2-4% balance transfer fee isn't that much. But I imagine on say a 20k cc with 0% your current minimum payments are only 300-400 dollars. Like I said before work on one that is closer to the credit limit and pay that down while paying minimum on the other. With even 2500 a month going to cc debt youll be done with this soon.

Other things since you say you pay for things seperately, how about car insurance? Its cheaper usually to bundle it. Cell phones? etc etc. I bet you can find a lot of savings if you try hard enough. Or eat a lot of cup of noodles :happy
Luckily my company pays my phone. However, car insurance is one I forgot to look into, so will do that tonight. Thank you for the suggestion :)

mortfree
Posts: 972
Joined: Mon Sep 12, 2016 7:06 pm

Re: Take a 401k Loan?

Post by mortfree » Wed Jan 17, 2018 6:37 pm

You really do not have a handle on your finances. It seems like with each thread you are trying to undo a move you made previously (and asked about on here beforehand).

Too much tinkering.

User avatar
BolderBoy
Posts: 3907
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Take a 401k Loan?

Post by BolderBoy » Wed Jan 17, 2018 6:53 pm

kwarden13 wrote:
Wed Jan 17, 2018 2:31 pm
I am debating taking a 401k loan to pay off some debt in order to raise my credit score.
This is a wretchedly bad idea. Don't do it.

As others have pointed out, you cannot borrow yourself out of debt.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

kwarden13
Posts: 154
Joined: Sat May 13, 2017 3:34 pm

Re: Take a 401k Loan?

Post by kwarden13 » Wed Jan 17, 2018 6:56 pm

BolderBoy wrote:
Wed Jan 17, 2018 6:53 pm
kwarden13 wrote:
Wed Jan 17, 2018 2:31 pm
I am debating taking a 401k loan to pay off some debt in order to raise my credit score.
This is a wretchedly bad idea. Don't do it.

As others have pointed out, you cannot borrow yourself out of debt.
Understood, I thought this may be frowned upon and am glad I posted to get some Boglehead feedback. I will continue the course and try to cut my spending where I can.

User avatar
BolderBoy
Posts: 3907
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Take a 401k Loan?

Post by BolderBoy » Wed Jan 17, 2018 7:17 pm

kwarden13 wrote:
Wed Jan 17, 2018 6:56 pm
BolderBoy wrote:
Wed Jan 17, 2018 6:53 pm
kwarden13 wrote:
Wed Jan 17, 2018 2:31 pm
I am debating taking a 401k loan to pay off some debt in order to raise my credit score.
This is a wretchedly bad idea. Don't do it.

As others have pointed out, you cannot borrow yourself out of debt.
Understood, I thought this may be frowned upon and am glad I posted to get some Boglehead feedback. I will continue the course and try to cut my spending where I can.
You'll come out of this doing okay, I'm quite sure. And insofar as your credit score... It will recover with your diligence.

Last January I missed a credit card bill for $129. And I missed making payments on it for the next 5 months, then paid it off completely. By then the charge had risen to $300 including all the fees and penalties. My prior FICO score had been 800+ for decades. This one issue dropped it to 600. It has been slowly - ever so slowly - rising since then; around 700+ now. Maybe in a year it'll be back up over 800, who knows.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

delamer
Posts: 4807
Joined: Tue Feb 08, 2011 6:13 pm

Re: Take a 401k Loan?

Post by delamer » Wed Jan 17, 2018 9:49 pm

mortfree wrote:
Wed Jan 17, 2018 6:37 pm
You really do not have a handle on your finances. It seems like with each thread you are trying to undo a move you made previously (and asked about on here beforehand).

Too much tinkering.
Mortfree has a point.

You have a good combined income. Get the mortgage refinanced on your wife’s salary, keep the cars for 10 years, max your retirement contributions, scrimp until you get the $40,000 paid off, and set up a budget with your wife.
Last edited by delamer on Wed Jan 17, 2018 10:58 pm, edited 1 time in total.

wannabebogler
Posts: 60
Joined: Mon Jul 07, 2014 10:02 am

Re: Take a 401k Loan?

Post by wannabebogler » Wed Jan 17, 2018 10:31 pm

BolderBoy wrote:
Wed Jan 17, 2018 7:17 pm
kwarden13 wrote:
Wed Jan 17, 2018 6:56 pm
BolderBoy wrote:
Wed Jan 17, 2018 6:53 pm
kwarden13 wrote:
Wed Jan 17, 2018 2:31 pm
I am debating taking a 401k loan to pay off some debt in order to raise my credit score.
This is a wretchedly bad idea. Don't do it.

As others have pointed out, you cannot borrow yourself out of debt.
Understood, I thought this may be frowned upon and am glad I posted to get some Boglehead feedback. I will continue the course and try to cut my spending where I can.
You'll come out of this doing okay, I'm quite sure. And insofar as your credit score... It will recover with your diligence.

Last January I missed a credit card bill for $129. And I missed making payments on it for the next 5 months, then paid it off completely. By then the charge had risen to $300 including all the fees and penalties. My prior FICO score had been 800+ for decades. This one issue dropped it to 600. It has been slowly - ever so slowly - rising since then; around 700+ now. Maybe in a year it'll be back up over 800, who knows.
These stories are surprising to me. I had a foreclosure of a 2nd mortgage a few years back and it only dropped my score to around 610. It took me 8 years (I assume for the note to drop off my credit history) but I finally got it back up over 800.

User avatar
BolderBoy
Posts: 3907
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Take a 401k Loan?

Post by BolderBoy » Wed Jan 17, 2018 10:36 pm

BolderBoy wrote:
Wed Jan 17, 2018 10:31 pm
Last January I missed a credit card bill for $129. And I missed making payments on it for the next 5 months, then paid it off completely. By then the charge had risen to $300 including all the fees and penalties. My prior FICO score had been 800+ for decades. This one issue dropped it to 600. It has been slowly - ever so slowly - rising since then; around 700+ now. Maybe in a year it'll be back up over 800, who knows.
These stories are surprising to me. I had a foreclosure of a 2nd mortgage a few years back and it only dropped my score to around 610. It took me 8 years (I assume for the note to drop off my credit history) but I finally got it back up over 800.
I dunno, maybe the CC company sent along a note to the credit bureaus telling them what a putz I really am (cuz I pay the cards off each month and hadn't actually used this particular card in over two years).
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

User avatar
wander
Posts: 2464
Joined: Sat Oct 04, 2008 9:10 am

Re: Take a 401k Loan?

Post by wander » Wed Jan 17, 2018 11:29 pm

I would not borrow money from 401k nor max out the 401k contribution. I would just contribute up to company match and no more after that then use the extra money to pay the debt.

User avatar
bottlecap
Posts: 5562
Joined: Tue Mar 06, 2007 11:21 pm
Location: Tennessee

Re: Take a 401k Loan?

Post by bottlecap » Thu Jan 18, 2018 1:56 am

I think taking a 401k loan with the investing history you describe would be a last resort. Like "I gotta eat" last resort.

This is not a case of oversaving in a 401k and taking a loan to access that money to buy a house.

This is taking out a 401k loan to pay an investment debt (really gambling debt - was this on margin?) so that you can make another lender think you a safe bet when you apply for another loan to go further into debt. That’s a jarring perspective, no?

The circumstances and the history you describe do not portend a good outcome. You have to get things under control. A 401k loan would simply postpone that day of reckoning.

Good luck,

JT

kwarden13
Posts: 154
Joined: Sat May 13, 2017 3:34 pm

Re: Take a 401k Loan?

Post by kwarden13 » Thu Jan 18, 2018 10:59 am

bottlecap wrote:
Thu Jan 18, 2018 1:56 am
I think taking a 401k loan with the investing history you describe would be a last resort. Like "I gotta eat" last resort.

This is not a case of oversaving in a 401k and taking a loan to access that money to buy a house.

This is taking out a 401k loan to pay an investment debt (really gambling debt - was this on margin?) so that you can make another lender think you a safe bet when you apply for another loan to go further into debt. That’s a jarring perspective, no?

The circumstances and the history you describe do not portend a good outcome. You have to get things under control. A 401k loan would simply postpone that day of reckoning.

Good luck,
JT
Appreciate the feedback. I am not going into more debt. I am more reshifting the debt. I already have a mortgage so refinancing is not putting me into further debt. Same with shifting credit card debt to '401k debt'. Also, the investment loss I had was not really an investment, I am just calling it that. It also wasn't a spending issue. It was a personal loss due to very unfortunate circumstances that I could not control.

Anyways, I am still not taking out the 401k loan and am just going to pay it back as fast as I can.

thangngo
Posts: 985
Joined: Sun Feb 26, 2017 2:08 pm

Re: Take a 401k Loan?

Post by thangngo » Thu Jan 18, 2018 11:33 am

kwarden13 wrote:
Wed Jan 17, 2018 2:31 pm
I am debating taking a 401k loan to pay off some debt in order to raise my credit score. In November, I didn't have much debt and my credit score was about 750. However, I had a bad investment choice and ended up $65k in debt. I have paid it down to about $40k right now (holiday bonus) and it is all on 0% interest cards until Jan 2019. I could probably pay off by then with little problem.

Now my spouse and I are looking to refinance the house to drop PMI. The mortgage company said she could be on the loan by herself since my credit has tanked to about 600 due to the debt. In addition, we may need $5-7k in order to hit the 80% LTV to drop PMI.

Should I take out a 401k loan to bring my score up? If I paid off $20k, my credit score would go back up to the 700s and I could be on the loan. I have $90k in my 401k, am 29 years old, and max it out. If I take out the loan, I can still max out my 401k. Also, never leaving my job and very low risk of layoff. And I would target to pay back over 24-36 months while still maxing out my 401k.
Keep your eye on longer term goals. You can't build your wealth with being in debt. $200 PMI a month relatively has no impact on your long term goals. Try to get out of debt now instead of taking the 401k loan and make a bet that it will increase your credit score.

tesuzuki2002
Posts: 333
Joined: Fri Dec 11, 2015 12:40 pm

Re: Take a 401k Loan?

Post by tesuzuki2002 » Thu Jan 18, 2018 11:40 am

kwarden13 wrote:
Wed Jan 17, 2018 2:31 pm
I am debating taking a 401k loan to pay off some debt in order to raise my credit score. In November, I didn't have much debt and my credit score was about 750. However, I had a bad investment choice and ended up $65k in debt. I have paid it down to about $40k right now (holiday bonus) and it is all on 0% interest cards until Jan 2019. I could probably pay off by then with little problem.

Now my spouse and I are looking to refinance the house to drop PMI. The mortgage company said she could be on the loan by herself since my credit has tanked to about 600 due to the debt. In addition, we may need $5-7k in order to hit the 80% LTV to drop PMI.

Should I take out a 401k loan to bring my score up? If I paid off $20k, my credit score would go back up to the 700s and I could be on the loan. I have $90k in my 401k, am 29 years old, and max it out. If I take out the loan, I can still max out my 401k. Also, never leaving my job and very low risk of layoff. And I would target to pay back over 24-36 months while still maxing out my 401k.
Taking on $65K of debt made my credit score go up. I don't understand why yours would go down. As long as your current on payments.

chevca
Posts: 1546
Joined: Wed Jul 26, 2017 11:22 am

Re: Take a 401k Loan?

Post by chevca » Thu Jan 18, 2018 12:04 pm

As others are mentioning/hinting/questioning, there's obviously more to the story here than credit utilization causing a drop from 750 to 600. No need to tell the story, OP, but I doubt your credit would just bounce back by paying off the balance. Whatever happened will take a while to repair. So, do the refi in her name only and call it good.

Then work on paying off your debt and let time heal the credit score. Don't take a 401k loan to do that though.

Snezz1e
Posts: 26
Joined: Wed Mar 14, 2012 11:48 am

Re: Take a 401k Loan?

Post by Snezz1e » Thu Jan 18, 2018 3:15 pm

I don't really see the issue with taking a 401k loan. Many people are saying to lower 401k contribution down to matching and pay off debt. If he does that he would miss out on contributing the max for this year. He can never get that back. It seems like its better to borrow 20k at a decent interest rate and contribute the 20k this year then it is to reduce contribution by 20k. He loses that tax advantage contribution space forever for this year.


An alternate option you could consider is to refinance your auto loan. What is your current interest rate and equity in the cars. Banks usually loan based on NADA Retail value which is a bit more than private party blue book value. What you could do is refinance with a low rate credit union (DCU is 65months 2.24%). DCU for example, will loan up to the retail value and send you the cash difference between the loan amount and how much you owe. If the rate is lower you'll save on interest and your payments will be lower from stretching out the loan term. I did this with my and my brothers car to get about $30,000 cash back when the rate was 1.74% put all the money in Insight prepaid cards earning 5%. This way I make a small interest profit and also boost my emergency fund.

Only issue is you may not qualify for current rate with your current credit score. You would either have to temporary borrow from 401k to raise credit score or finance under your wife's name.

WhiteMaxima
Posts: 1107
Joined: Thu May 19, 2016 5:04 pm

Re: Take a 401k Loan?

Post by WhiteMaxima » Thu Jan 18, 2018 3:31 pm

I don't see issue taking a 401k loan. During a stock and bond bubble, take a loan is just like taking profit. You should use the loan to pay high interest debt you might have. Suppose you have a 15% credit card balance, taking a 401k loan at 3.5% to pay off 15% loan. Plus, you are paying interest to youself.

kwarden13
Posts: 154
Joined: Sat May 13, 2017 3:34 pm

Re: Take a 401k Loan?

Post by kwarden13 » Thu Jan 18, 2018 3:35 pm

Snezz1e wrote:
Thu Jan 18, 2018 3:15 pm
I don't really see the issue with taking a 401k loan. Many people are saying to lower 401k contribution down to matching and pay off debt. If he does that he would miss out on contributing the max for this year. He can never get that back. It seems like its better to borrow 20k at a decent interest rate and contribute the 20k this year then it is to reduce contribution by 20k. He loses that tax advantage contribution space forever for this year.
This was my thought. Not sure why I would stop contributions and forgo the tax advantage. I realize borrowing is not something I should do all the time, but what is the difference if I pay off my cc's or the 401k loan. I realize the 401k has certain risks and the money will not earn money. So would miss out on that.

Either way, trying not to do it for now as my cc's are at 0%. It's just my credit score hurting and it seems we can get by for now without it increasing.

thangngo
Posts: 985
Joined: Sun Feb 26, 2017 2:08 pm

Re: Take a 401k Loan?

Post by thangngo » Thu Jan 18, 2018 3:51 pm

Pros and Cons of 401k loan

Advantages:

• The loans incur no income tax or penalties for early withdrawal unless you default.
• There is no credit check or long application form, opening options if your credit scores are bad.
• Most loans become available quickly and you can borrow for almost any reason.
• Most 401(k) loans come with interest rates cheaper than credit cards charge.
• You pay interest on the loan to yourself, not to a bank or other lender.

Disadvantages:

• To borrow money, you remove it from investment in the market, forfeiting potential gains.Calculate your potential losses carefully.
• Borrowed funds are taxed twice. You earn and pay taxes on wages and use those after-tax funds to repay the loan. During retirement, you again pay taxes, this time on withdrawn funds. If you're in the 25% federal tax bracket, twice the tax is extremely expensive.
• You ultimately contribute less to your retirement plan because a portion of new contributions goes toward paying off the loan.
• Not all 401(k)s allow employees to borrow from the accounts. Check with your human resources department before you even begin to consider a loan.
• If you cease working with your current employer, your entire loan usually comes due within 60 days – making your job security for the next five years a big consideration. The loan defaults if you can't repay; you pay tax on the outstanding amount and incur a 10% early withdrawal penalty until you reach age 59½.

There is also a freeze period (3-6 months) that prevent you contributing to your 401k after you take a loan or distribution.

Consider a 401(k) loan only if you exhaust all other financial resources, including home-equity loans. See more at this link.

All this for a reduction of $200 PMI? hmmm...

N10sive
Posts: 543
Joined: Thu May 05, 2016 6:22 pm

Re: Take a 401k Loan?

Post by N10sive » Thu Jan 18, 2018 3:54 pm

WhiteMaxima wrote:
Thu Jan 18, 2018 3:31 pm
I don't see issue taking a 401k loan. During a stock and bond bubble, take a loan is just like taking profit. You should use the loan to pay high interest debt you might have. Suppose you have a 15% credit card balance, taking a 401k loan at 3.5% to pay off 15% loan. Plus, you are paying interest to youself.
I would advise taking a 401k loan if the interest rates on the CC's where horrendous. Currently they are at 0% for a year. There is no reason to take a loan, just to increase credit score when there currently is no underlying reason except to be on a mortgage loan with her other half*. I get 5 offers a week for new cards with 0% transfers with 2% fees. I don't think they are going away anytime soon.

Also what if the market keeps rising? Yeah you have taken profits but when your paying back the loan you could be purchasing that same stock for more etc. There are a lot of if's, and's etc. But just moving debt to move debt isn't getting rid of the debt.

OP, When I asked for advice since I was in a similar situation a year ago, one year of stopping retirement savings isn't going to mean a lot in the grand scheme of things. Yes you'll pay taxes but you also could be out of debt faster. I still went the route of keeping my debts on 0% cc's its just taking longer while contributing to my retirement accounts. It just depends on how much the debt weighs on you, your job security, etc.

*I would only be hesitant to not be on a mortage with my other half in any event of being seperated but that is another question none of us would know the answer to.

TSR
Posts: 676
Joined: Thu Apr 19, 2012 9:08 am

Re: Take a 401k Loan?

Post by TSR » Thu Jan 18, 2018 4:03 pm

thangngo wrote:
Thu Jan 18, 2018 3:51 pm
• Borrowed funds are taxed twice. You earn and pay taxes on wages and use those after-tax funds to repay the loan. During retirement, you again pay taxes, this time on withdrawn funds. If you're in the 25% federal tax bracket, twice the tax is extremely expensive.
This is a myth that has been debunked. There are good and bad reasons to take a 401k loan (in this case it seems clear to me that OP should not take a 401k loan over just paying the debt he owes), but double-taxation is not one of them.

emoore
Posts: 433
Joined: Mon Mar 04, 2013 8:16 pm

Re: Take a 401k Loan?

Post by emoore » Thu Jan 18, 2018 4:37 pm

thangngo wrote:
Thu Jan 18, 2018 3:51 pm
• If you cease working with your current employer, your entire loan usually comes due within 60 days – making your job security for the next five years a big consideration. The loan defaults if you can't repay; you pay tax on the outstanding amount and incur a 10% early withdrawal penalty until you reach age 59½.

There is also a freeze period (3-6 months) that prevent you contributing to your 401k after you take a loan or distribution.
I think the 60 days has changed now because of the new tax laws. You have until tax time (April 15th) the following year to pay off the loan if you lose your job.

The freeze period is specific to one's 401k plan. Mine does not have this restriction. I can take out a $50k loan and still contribute $18.5k to my 401k for the year.

kwarden13
Posts: 154
Joined: Sat May 13, 2017 3:34 pm

Re: Take a 401k Loan?

Post by kwarden13 » Thu Jan 18, 2018 4:43 pm

Same here. I actually don't have any restriction on not being able to contribute and it does not say anything about if employment is terminated. States LOA payback is deferred the whole time.

ERISA Stone
Posts: 1480
Joined: Tue Jun 24, 2014 8:54 am

Re: Take a 401k Loan?

Post by ERISA Stone » Thu Jan 18, 2018 6:04 pm

thangngo wrote:
Thu Jan 18, 2018 3:51 pm

There is also a freeze period (3-6 months) that prevent you contributing to your 401k after you take a loan or distribution.

While a plan can suspend 401k contributions when a participant takes a loan, this is not the norm. I believe you're thinking about hardship distributions. in which there is a required suspension period.

User avatar
whodidntante
Posts: 3427
Joined: Thu Jan 21, 2016 11:11 pm

Re: Take a 401k Loan?

Post by whodidntante » Thu Jan 18, 2018 8:14 pm

A person can learn from their mistakes and take a 401k loan simultaneously.

User avatar
bottlecap
Posts: 5562
Joined: Tue Mar 06, 2007 11:21 pm
Location: Tennessee

Re: Take a 401k Loan?

Post by bottlecap » Thu Jan 18, 2018 10:34 pm

kwarden13 wrote:
Thu Jan 18, 2018 10:59 am
bottlecap wrote:
Thu Jan 18, 2018 1:56 am
I think taking a 401k loan with the investing history you describe would be a last resort. Like "I gotta eat" last resort.

This is not a case of oversaving in a 401k and taking a loan to access that money to buy a house.

This is taking out a 401k loan to pay an investment debt (really gambling debt - was this on margin?) so that you can make another lender think you a safe bet when you apply for another loan to go further into debt. That’s a jarring perspective, no?

The circumstances and the history you describe do not portend a good outcome. You have to get things under control. A 401k loan would simply postpone that day of reckoning.

Good luck,
JT
Appreciate the feedback. I am not going into more debt. I am more reshifting the debt. I already have a mortgage so refinancing is not putting me into further debt. Same with shifting credit card debt to '401k debt'. Also, the investment loss I had was not really an investment, I am just calling it that. It also wasn't a spending issue. It was a personal loss due to very unfortunate circumstances that I could not control.

Anyways, I am still not taking out the 401k loan and am just going to pay it back as fast as I can.
I'm sorry about the loss. If it was not of your doing, then it's not quite as much of a concern. I think you are right to be wary, but if you are aware of the potential pitfalls and sometime decide you need to, there are worse things than a 401k loan.

Good luck,

JT

Post Reply