Last week, I wrote about some reasons it might actually make sense to borrow from your 401(k). After all, there’s no credit check and the interest goes back into your own account. But even in those situations, there may be better options. After all, borrowing from your 401(k) means your money isn’t growing for retirement, the money generally has to be paid back over a relatively short 5 year period, and the outstanding balance could be subject to taxes and penalties if you leave your job. Here are three alternatives along with their pros and cons relative to a 401(k) loan and a couple of sites you can use to find them:
1) Home equity loan or line of credit.
Pros: If you have good credit, the interest rate is typically lower than what you can expect to earn on your retirement plan investments, especially after factoring in the tax deduction. You can also generally spread the payments out much longer.
Cons: You need enough home equity and good credit. Also, your home is on the line if you can’t make the payments.
2) Low interest balance transfer credit card
Pros: The interest rate can be as low as 0%. You can spread the payments out over a very long time. You can wipe it out in bankruptcy.
Cons: You need good credit to qualify. There are usually balance transfer fees. The lowest interest rates tend to be temporary and can jump up to quite high rates after the teaser rate expires.
3) Peer-to-Peer loan
Pros: The interest rate is generally lower than a typical credit card rate or personal loan from a bank. You may prefer paying people rather than an institution. You can wipe it out in bankruptcy.
Cons: You need excellent credit to qualify for the lowest interest rates. The interest rate can still be higher than what you can expect to earn on your retirement plan investments.
The only one I’ve had any personal experience with is low interest balance transfer credit cards, which I’ve written about here. Do you have any experiences or opinion to share about any of these options? Leave your thoughts in the comments section below.