A 401(k) loan is very convenient because you easily get a loan from your own savings. You can repay it with interest to your own account, which seems highly beneficial. Although there are numerous benefits, you need to think twice before you take a 401(k) loan with regard to the following things:

The convenience of a 401(k) loan
A 401(k) loan is highly convenient for those who need money urgently. After all, you are borrowing money from your own savings and repaying it. In the process, you don’t pay interest to anyone else, which definitely sounds attractive.

If you take a look at the statistics, you’ll find that nearly 11 million Americans every year borrow from their 401(k) account. The main reason for them opting for this loan is to pay off credit card bills with high interest rates, and home repairs is the next important reason.

Why take a 401(k) loan?
A 401(k) loan is beneficial in the following ways:

• The loan process is simple and quick. Even if you have a low credit score, it doesn’t matter because you are borrowing your own money.
• The interest rates would be better than the rates you pay for credit cards and many other loans.
• The interest you pay goes back to your account, which means you are not paying interest to a third party.
• If you have to pay off high-interest loans, this is a good option.

The risks involved
It is also important to understand the risks associated with a 401(k) loan:

• If you default on your loan, there would be taxes as well as penalties applicable.
• If you lose your job when you have taken a loan, you need to repay it before the last date for the payment of taxes, else it would be considered as distribution and taxes will be levied. 10% of loans are defaulted because of a job change or loss of a job.

When you take a 401(k) loan, you are taking away money from your retirement savings. The average 401(k) savings of Americans is $91,300 which may not even be enough to cover health expenses. In such a situation, taking money from the retirement fund may not be a wise option.
When you withdraw money as a loan, you lose out on the interest you earn on it. You would also, in most cases, not be able to continue contributions since loan repayment will be made by deducting money from your paycheck.

As a result, it would be advisable to check the interest rates on other loans like home equity loans before deciding to take a 401(k) loan. The 401(k) is a nest egg for the future, and it is risky to reduce it by taking a loan.

While opting for a 401(k) loan may seem convenient, there are risks associated with it. It is wise to choose this loan only if you need to pay off bills that have a higher interest rate, and if you are confident of being able to repay it.