financial gurus

[shnelson]

Couldn't find a specific spot on the forums to pose this thread, so hopefully this is sufficient.

I've been pondering taking out a loan against my 401k to pay off a vehicle loan. This seems like a good idea, so long as it stays disciplined and on track for re-payment as I understand there are significant costs to withdrawing from the 401k early.

If I understand correctly, the interest paid against a 401k loan comes back to me and does not go to a financial institution like a vehicle loan does. So, let's make the following assumptions (just throwing numbers out there):

Person buys a vehicle with a $20,000 loan through financial institution @ 3.9% APR. Monthly payments approximately $400 over 5 years.

At 2.5 years, loan is half paid down and over $1500 has gone to interest alone. Would it make sense to pay off the vehicle loan at $10,000, with a 3 year loan from 401k and interest rate of say 9.5%? The payments would be cheaper by about $100, and the 401k would gain about $1000 in the end (plus a cost avoidance of another $1500 going to the bank). I also understand that the $10k taken out as a loan would no longer be compounding in the 401k account, but it seems more sensible to pay myself interest in the long run rather than someone else?

Is there a good reason why not to take a 401k loan out? Just fielding for some answers here as I know there is a lot of knowledge on the forums.

Now - Please, discuss

[SpecialK]

Couple things that I would like to share as I have experience with both.

Credit scores are based on a few things and the big three reporting agencies are really the ones in control of it:

1: Debt to income ratio - how much debt you have compared to how much income you have coming in. i.e. You make 40k a year and have 0 debt you get a better score (ignoring repayment history for the moment). If you have too much debt for your income your score goes down. Having debt is not a bad thing, you just need to make sure that you are not riding the knife edge. If you have a credit card in your pocket with a 5k limit on it, that is considered debt whether there is a balance on the card or not, to the reporting agency that is a 5k debt. Yes it's better to have some debt than no debt.

2: Credit inquiries - a lot of inquiries will hurt your score whether it's you trying to get a loan or credit card companies ping your files to make unsolicited offers. The more inquiries the worse your score. I am not sure how much it hurts your score but it does affect it.

3: Repayment history - if you pay all your bills on time or not. Missing a payment or two will hurt your score but if I remember right not as much as you might think. As long as you are back to current on them.

4: The credit reporting agencies have the right to change their minds at any time. There really are no set in stone for them and they change things all the time. Sad but true.

As far as the 401k loan, I have taken out a couple and while I would say leave the money in there if you don't need the money, it is a viable option for a loan that you can use for whatever you need the money for. In my situation they will only allow you to take a percentage of the total amount currently in your 401k (50% maybe). The interest rate goes up if you take out another loan after you pay off the previous one. i.e. 3% on the first loan, pay that off and take another one 7% for the next one and so on. This is how mine works and your mileage may vary.

[muddpuppy]

I will share with you my once brilliant IDEA. I thought the same as you I will pay myself through 401k!!!!

What I did was file exempt on my taxes. I set my 401k to the max and put the rest into a donottouch account. At the end of the year I would file for an extension on taxes. To save and pay me more!!! I would then pull a 401k loan to pay off taxes. I would pay the 401k loan with the DONOTTOUCH account.

All was good for 3 years my 401k went through the roof. I reduced my overall taxes paid out. I had a great job no worries.

One day a few jack holes flew some plains into a building. The company I worked for sank in a hurry and I along with a lot of others lost their good to great jobs. At the time I was younger! and had all my 401k invested in high risk . So I was without a job and 401k was in the tank and I could not pay back my loan and made all the money without paying taxes. How many years later and I am just digging myself out of that Brilliant Idea.

I guess the point of the story is you never know what's around the corner. No matter how secure you think you are.

Wish you luck on your decision. Also 401k's are on the rise. you will likely be pulling money while the stocks are down to reapply the money while the stocks are up which is a loss.