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If you need money and cannot get a loan, due to poor credit, you may consider dipping into your 401k. Many companies allow their employees to borrow from their 401k plans. If you have this option, you may consider taking it. However, is it the best idea? Like most financial choices, 401k loans have their pros and cons. What are they?

The Pros of 401k Loans

No credit check is required. In a way, this is your money. Right now, your company is in control of it. Since the money will eventually become yours, most employers do not have a problem dispensing loans. In fact, they do so without credit checks. Not paying back a 401k loan has many consequences. Due to that fact and the damaging financial impact, most employers know their employees will make good on repayment. That is why a loan is usually offered and without a credit check. If you need money in pinch and have poor credit, borrowing from your 401k may be your only option.

Low interest rates, which you eventually recoup. As previously stated, the money in a 401k plan is yours. Your company is just in charge of managing the funds. For that reason, you are paying interest on your own loan. Not only are you charged low interest rates, unlike the inflated rates for payday loans, you get the money back!

You know what to expect. Your company has as much interest in your 401k as you do. They want to ensure you use the money and properly. For that reason, a company representative will do more than just hand you a check. They will work with you to ensure you understand the process. There should be no surprises. You know exactly how much money you borrowed, how much you need to repay, by when, and the consequences for missing payments. With the recent concern of adjustable rate mortgages, which left many mortgage borrowers surprised and in foreclosure, this should be welcoming news.

The Cons of 401k Loans

Double taxation. 401k plans are tax deferred. Any contributions to your account through payroll deductions reduce your taxable income. For example, if you earn $50,000, but contribute $2,000 to your 401k, your taxable income from the year is $48,000. Unfortunately, that money is taxed when withdrawn. Since you are required to pay that money back, you are taxed again. Why the tax? You are repaying a loan, not technically contributing to your retirement savings.

Many rules and restrictions. For starters, not all employers enable their employees to take a 401k loan. If it is allowed, an application is required. This application is shorter than most bank-approved loans, but approval is not guaranteed. For the most part, businesses prefer to do short-term loans. These loans are typically repaid within 5 years. Car repairs or medical bills are considered short-term loans. Long-term loans, small to medium sized companies tend to stay away from. These expensive loans take much longer to payoff, like home loans.

You can lose money. When working to repay a 401k loan, most employees stop contributing to their fund. Remember, you are repaying the loan not adding more to your account. Although the money is entering back into your retirement fund, it falls into a separate category. If you can, continue to make regular contributions. If you cannot, you miss out of free money from employer contributions.

Fees. You may be charged a fee for requesting a 401k loan. If this fee exists, your employer will determine its cost. On average, it is $50. This fee covers the cost of overseeing of the loan.

As you can see, there are a number of pros and cons to borrowing against your 401k. So, what should you do? If in dire need of money, opt for a loan. Never borrow more than you need, use as a last resort, try to continue with regular contributions, and repay in a timely matter.

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In today’s troubling economy, many Americans are finding it difficult to stay afloat financially. Those who are lucky enough to not lose their jobs are still faced with troubles. They are left wondering, day after day, if the shoe will drop. Even those in strong and stable careers are being asked to take pay cuts. If your family is one of the millions suffering financial hardships, you may need financial help and right away.

When one wants to buy a new home, buy a new car, pay for car repairs, or pay for costly medical bills, most turn to financial lenders. Automobile loans, personal loans, and mortgage loans have been solving financial problems for years. Unfortunately, times have changed. Banks have tightened the belt and a less are lending. What does this mean? A mother to four with average credit may be unable to secure a loan to replace her broken down car. Unfortunately, we are talking about a serious purchase here. How will that mom get to work, buy groceries, and transport her kids? Not everyone is in areas where public transportation is available. That mom may turn to her 401k.

For years, financial experts have advised against dipping into 401k retirement savings. In fact, it was once considered a financial sin. Yes, in most cases they are right. You should not take a loan from your 401k. By doing so, you tread in dangerous waters. For starters, most individuals are mistaken about taking money from a 401k plan. See, you don’t just take it. Yes, it was your money that was originally invested into the plan, but it isn’t “legally,” your money now. Your employer is in control of it. They made an agreement to give you that money, but not until you are 60 years old. If you dip into your retirement savings before 60 years of age, you are not taking what is rightful yours. Instead, you are a taking a loan. A loan that must be repaid.

So, should you withdraw money from your 401k? It depends on the situation. Do you need a new wardrobe? If so, don’t. If you cannot afford it, do not buy it. If you need a new vehicle and have no other options, dip into your 401k plan. With that said, do not borrow more than you need. Your employer will develop a repayment plan. Pay in a timely matter. In fact, see if these payments can be automatically withdrawn from your paycheck. Automatic deductions lessen the risk of default. In the event you change employers and roll the remainder of your 401k plan over, you are still required to payback the amount borrowed. In fact, the term of your loan may significantly shorten in the event of a job change.

Although there are certain situations in which borrowing from a 401k is called for or acceptable, try all other avenues first. Start with your local banks. Just because you think you will not get a loan, it does not mean you will be denied. Improve your chances of success by speaking with a loan officer; don’t just drop off the application. Sell yourself. If that does not work, try friends and family. See if you can borrow money to stay financially afloat. Although you are dealing with friends and family, if you do get a loan, repay. Do not opt for a payday loan. They are very risky and dangerous. When compared, the risks of borrowing from your 401k are smaller than with payday loans.

In short, this troubling economy leaves many in a financial bind. Do what you must to survive, but always use your best judgment and consider speaking with a financial advisor. The stock market is suffering and so are many private investments. Do not pullout or withdraw your money before you are able to see an improvement.

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You start a new job. Great! Not long, a company representative will educate you on the perks of your new job. For many, this includes a 401k program. Not all employers offer 401k plans. If yours does, take it! Social Security is unable to carry retirees through their golden years as it once did.

Although there are rarely any negative consequences to starting a 401k retirement plan, unless you decide to borrow or cash out early, you need answers to some important questions. Someone in your company’s office, possibly the person who introduced the 401k plan to you, should have these answers.

Question: How much can I contribute? Employee contributions to a 401k are automatically deducted from pay. With that said, there are some rules and restrictions. Depending on income level and company preference, there are some limits. For most, this is not an issue, as average workers rarely contribute the maximum amount to their 401k. Still, it is a good question to ask.

Question: Do you match employee contributions? This is very important to know. If you are unsure if a 401k plan is right for you, the answer to this question may be the deciding factor. If you are lucky and your employer matches 100% of your contributions, your investment money doubles! 401k plans with matching employer contributions is one of the easiest ways to plan for retirement.

Question: How much do you match? Not all employers match employee 401k contributions. If you are in a well-known company, yours likely does. That is one of the reasons why these companies survive. They extend perks to hardworking employees, ensuring they stay on the job. If your new company matches 401k contributions, there are likely to be some restrictions. The percentage can be preset, vary depending on the hours you work or time with the company.

Question: What type of investments can I make? This is important, as a 401k plan varies depending on the company in question. One of the worst things you can do is allow a “financial expert,” to handle the investment for you. Many Americans did this and many are now seeing their retirement funds washed away. You can rely on the help of a financial advisor provided by your own company, but do your own research too. You should be able to choose between stocks and bonds. Mix it up a bit to ensure your money is spread out and safe.

Question: Can I change investment options and how often? 401k retirement plans are different from Social Security and pensions, as you are in control. Most allow you to change your investments, like by trading stocks or opting for short-term bonds. With that said, there may be restrictions on how often these changes are made. Even if you are only allowed a limited number of changes a year, a 401k plan is still recommended. Just do the research to first make the right choice and choose the best investment opportunity for your personal needs.

Question: How can I get information on my account? Most employers make it easy for you to get up-to-date information on your account. Some mail quarterly earning reports. Others have the information available online and it is usually available over-the-phone. How often you are able to receive information on your 401k investments depends on the company’s updating system. Some update their records weekly, while others opt for monthly updates.

Now that you know a few important questions to ask your employer about their 401k program, it is important to ask. Many individuals in their 20s are unconcerned about retirement. Some even decide not to contribute to a 401k. Of course, it is your right, but there are many benefits to planning for retirement early. As previously stated, some employers match employee contributions. This is essentially free money. Even if your employer only matches 25% of your contributions, you would be silly not to participate.

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