Should I take a 401k loan or personal loan?

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haranoth
Posts: 27
Joined: Wed Apr 06, 2016 12:07 pm

Should I take a 401k loan or personal loan?

Post by haranoth » Sun Feb 11, 2018 12:46 pm

Hi,

I am buying a property near my parent's place as an investment. The real estate there has high value potential.
I have been paying regular installments for 4 years to the developer to build this apt complex.
This year the high rise complex will be finished. Due to the nature of how the contract works out with the developer, I will need to pay out the rest of the money (35k) remaining at the end of July. They will let me make another 4 installments to meet my obligations , but will charge me a total of 8k more (with interest and fees) if I paid in installments stead of one shot pay, which I did not want to do. And wanted to pay the 35k in one shot.
I was planning to pull my investments in stocks and savings and sock away some more from upcoming salary to meet the 40k obligation.
I cannot take a home loan to pay this , since the property is outside of the country, where my parents retired.

Unfortunately, I also had a medical issues in my family , which kind of sidetracked my plans, I had to pull the trigger on my emergency fund as well.

My current monetary status

100k in 401k (traditional + Roth)
15k in Roth 401k IRA
17k in various individual stocks
2k remaining in emergency fund. I am not comfortable of having just 2k in my emergency fund.
Assuming no more emergency issues, I can may be add 2k more to my emergency fund and save 5k cash by July, if I am really aggressive.

So, given 5k cash in future salary. 17k sell of stocks.
That still leaves me with 13k short to buy off the property.
Unfortunately, due to the nature of the contract I pay the whole 35k or end up paying 8k extra interest+fees.

Hence, I am thinking of taking 13k loan from somewhere. Once again, being aggressive, I can pay back the loan in 7/8 months timeframe.
My work 401k allows for (prime rate (4.5% ) + 1%) 5.5% interest rate loan that I can take out.
With my credit score, some online lender was ready to give me a 5.5% interest rate loan as well.

Given, my current scenario, what do you guys recommend? Thanks...

bloom2708
Posts: 3359
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Should I take a 401k loan or personal loan?

Post by bloom2708 » Tue Feb 13, 2018 12:34 pm

*Deleted* Incorrect response.
Last edited by bloom2708 on Tue Feb 13, 2018 2:01 pm, edited 1 time in total.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

Khanmots
Posts: 1196
Joined: Sat Jun 11, 2011 2:27 pm

Re: Should I take a 401k loan or personal loan?

Post by Khanmots » Tue Feb 13, 2018 12:45 pm

bloom, while generally good advice I don't think it applies to the OPs situation.

It looks like he made the decision years ago, has paid significantly into this, and needs to make a final payment, a expensive installment option, or forfeit his investment entirely.

one thing to remember about 401k loans is that if you're laid off or otherwise leave the job they may be immediately due in full (read the SPD).

Katietsu
Posts: 1109
Joined: Sun Sep 22, 2013 1:48 am

Re: Should I take a 401k loan or personal loan?

Post by Katietsu » Tue Feb 13, 2018 12:53 pm

All else being equal, you should use a personal loan over a 401k loan. Make sure that the personal loan does not have any other significant fees above and beyond the interest payments.

FreemanB
Posts: 210
Joined: Thu May 22, 2014 5:55 am

Re: Should I take a 401k loan or personal loan?

Post by FreemanB » Tue Feb 13, 2018 1:38 pm

Katietsu wrote:
Tue Feb 13, 2018 12:53 pm
All else being equal, you should use a personal loan over a 401k loan. Make sure that the personal loan does not have any other significant fees above and beyond the interest payments.
I lean more in the opposite direction, where all else being equal(Payback period, costs, etc), the 401k loan is better than a personal loan. The biggest unknown is whether the 401k loan would have to be paid in full if the OP left his job. If so, then the personal loan would be a better approach. Other than that possibility, he seems to fit the criteria for a 401k loan, given plans to pay it back rapidly(7-8 months), small amount($13k), and reasonable use of the funds.(Not just funding additional spending, extenuating circumstances that aren't likely to be repeated)

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