It’s surprisingly easy to borrow from your 401(k) — but that doesn’t mean you should
But are such loans a good idea?
The advantages of such a loan include that there is no credit check and relatively little paperwork. In contrast to an outright withdrawal of money from your 401, furthermore, a 401 loan is tax-free. And compared with the interest rate you’d have to pay on some other kinds of consumer loans, the rate on a 401 loan is often significantly lower.
Yet another disadvantage is that you’re not really borrowing from your 401 but actually reducing the amount you have invested in your 401. Insofar as those investments appreciate during the time of your “loan,” your net cost will be a lot more than just the loan interest. To be sure, the opportunity cost of a 401 loan could instead work to your benefit if your 401 declined in value during the time of your loan. This happened, for example, to those who took out a loan from their 401 in 2007, before the Great Recession.
Furthermore, a HELOC doesn’t reduce the amount you have invested in your home equity. Even with a HELOC, you still will gain the entire amount on your real estate that you would have absent the loan.
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