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3. You must repay the money over a specified amount of time, usually no longer than five years. These payments will be deducted automati- cally from your paycheck.
4. Since it is a loan, you must pay interest on the loan. Check with your plan administrator to see what this interest rate will be. The good thing about this is the interest you pay goes back into your 401(k) so you are actually paying the interest to yourself.
5. You will be charged a loan origination fee. This can be as much as $75 or more. On $1,000 that means you take a 7.5% loss right away.
Advantages of Borrowing from Your 401(k)
Compared to other loan possibilities, there are some advantages to bor- rowing from your 401(k). These include:
• You don’t have to apply for the loan because you are borrowing from yourself and there is no credit check required to get the loan.
• The interest is usually low as it is a standard rate based on the prime rate and is not influenced by your credit score.
• The interest you pay goes back into your 401(k) account.
• You don’t have to pay taxes on the interest until you retire and begin taking withdrawals from your account.
Disadvantages of Borrowing from Your 401(k)
If there are advantages, there are always disadvantages as well and bor- rowing from your 401(k) is no different. These disadvantages include:
• While it feels like you’re borrowing, you’re actually spending that money you worked so hard to save and now have to save it all over again.
• The interest isn’t tax deductible as a 401(k) loan is considered a consumer loan. The payments deducted from your paycheck to
Where Should I Save My Money? 67