Should You Borrow from a Debt Consolidation Loan or Your Retirement Plan
When you are thinking about consolidating your debt, two options might come to mind: you might think of using a debt consolidation loan or you might consider borrowing money from your 401K retirement plan. While both of these options are viable solutions to use to consolidate your existing debts, you should know the pros and cons associated with each method before making an informed decision. Whether you choose a debt consolidation loan or borrow from your retirement plan, you have certain responsibilities you must meet and several things to consider.
If you choose to borrow from your retirement plan, you can often get money against your 401K with great ease. The money can then be used to pay off your debts. You are given a time period to repay the loan, and you can have payments deducted from your paycheck. You need to realize, however, that the funds you take out are no longer gaining interest; that you will pay severe penalties if you fail to repay your 401K, and any loan repayments you make to your retirement plan cannot work for you as a tax deduction. If you have poor credit, you may have a difficult time borrowing from other sources, however, borrowing against your retirement plan is still quite easy because you will not have to endure a credit check. Finally, in the event that you lose your job, the time frame for repayment of the loan is usually reduced to sixty to ninety days time, otherwise you will subject to early withdrawal penalties. If you borrow a lot of money this can prove problematic.
Now let’s consider using a debt consolidation loan. If the loan you get is secured, meaning you use a loan with collateral such as your home, you are immediately putting your collateral at risk. Some consumers take out second mortgages or home equity loan to pay off debts, but they are sometimes trading off one potentially dangerous financial situation for another. While a loan can be used to pay off debts, you are still in debt and to a new lender. If you fall behind the payment, you may wind up losing your collateral.
The advantages associated with a loan for paying off debts, however, include the fact that you can sometimes deduct your payments on your taxes. You can also lower the interest rates associated with your current debts, and you can simplify all of your bill management efforts since you will be paying off a loan to one lender instead of several creditors. If you opt for a home equity loan you will find that you can often get such a loan even if you have bad credit: this is because lenders are willing to take a bigger risk on you because you have some kind of collateral. If you opt for a personal loan that is unsecured, you will have to endure a credit check if you expect to be approved.
The answer to the question as to whether you should use a debt consolidation loan or retirement plan to pay off your bills is a personal one. Consider the pros and cons of doing so associated with each method of debt consolidation before you make your final decision. Each debt consolidation method has clear advantages, but some of the disadvantages are equally clear.
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