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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76611  
Subject: Re: 401k Borrowing Date: 10/31/2007 10:24 AM
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Either it's earning 5% interest or it's not. The fact that the interest being earned is coming out of your pocket is irrelevant if you were going to be paying the interest to another lender anyway. So it is earning interest.

If you're both earning and paying the interest, then your net gain is zero.

Now, that *may* be better than paying interest to another lender, where your net return on that loan is negative. Yes, that's true.

BUT, you're *still* losing 8-10% typically on investment returns.

So, the net effect is still:
401K loan: 0 - investment loss = -9% typically (pre-tax, remember)
other loan: varies greatly depending on a lot

If your debt situation is so awful that you're facing bankruptcy if you don't pay, a 401k loan might be a worthwhile last resort. If you're thinking of taking a 401k loan just to buy something, I would consider that monumentally unwise. There's a time and place for nearly every possible money move, but there are very few times and places for 401k loans.

This could quality under the 'emergency' I spoke of above. However, I still mostly disagree... only because the 401K loan is a 'quick fix', that will never teach you what you did to get into debt in the first place.

Now, if its some unpredictable, unavoidable thing like medical bills or a family emergency, ok. But - as seen time and time again on the Credit Card board - chances are, if you look real close, it has as much or more to do with expensive cars, big houses, expensive phone plans, private school, clothing, electronics, lattes, small business thats losing money with no real prospects for income, etc, then you're just setting yourself up for your next fall, and next time, the 401K won't be there.
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