Did you know you can take a loan out against your 401(k)? Well, now you do! 💲There's been an increase in 401(k) loans as Americans continue to struggle to make ends meet. Experts say that's an indicator of economic stress in our country, as if we aren't already feeling the burn. 🥴👛
If you're strapped for cash, should you turn to this option? 🤔 Keep reading!
Here’s Five Fast Facts on the rise of 401(k) loans:
- 💵 A Lending Hand - According to retirement plan provider Fidelity, roughly 17.6% of investors (four million people) have an outstanding 401(k) loan. That's up from 17.2% during Q2 of this year. In Q3 of 2022, 16.8% of investors had a loan.
- 📈 Mo' Money - The amount of each 401(k) loan has also increased over time. In 2022, the average worker took out a $15,000 loan. Between 2018 and 2021, the average loan amount was between $10,000 and $11,000.
- 🏦 Very Interest-ing - Unlike a traditional personal loan or credit card debt, borrowers of a 401(k) loan pay themselves back with interest. The interest is typically much lower than credit cards, which today is at a record high of over 21%.
- 🚨 Emergency Button - 401(k) loans are practical options for some people. For example, if you're hit with an unexpected medical emergency, a 401(k) loan could save you a ton of money in interest. You can also use a 401(k) loan to help cover the cost of a down payment on a home if you don't have any other savings.
- 🙅🏻♂️ Not a Fit - On the flip side, 401(k) loans aren't the best fit for others. If you're insecure about the future of your job, taking one of these loans could be risky. If you leave your job or get laid off, you may need to pay back your loan in full in a shortened time frame. If you can't make the payments, the loan might be considered a withdrawal, which is subject to income tax and penalties.
🔥Bottom line: Another thing to consider: when you borrow from your 401(k), it takes your money out of the market. In other words, you're reducing the amount of cash that's sitting and growing in your retirement account, which could hurt you long term. However, a 401(k) loan could really save your butt in a jam, so it all depends on your unique situation.
Have you ever taken out a 401(k) loan?
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