|
Home Equity Loan – Still A Better Idea Than A 401(k) Loan
By: Charles Essmeier
Anyone who borrows money is always looking for the cheapest source of funding.
That makes sense; no one wants to pay more in interest than is absolutely
necessary. And anyone with a sizeable amount of debt, such as credit card debt
or a student loan, would be wise to consolidate their debt with a lower interest
loan. One source of such a loan is a 401(K) account, which many consumers may
have through their employer. Since the interest rate on Federal student loans
rose on July 1, many students who missed that deadline may be wondering if
consolidating through a 401(K) loan is a good alternative. Is it?
In a previous article, we have outlined several reasons why borrowing against a
401(K) account may be less favorable than using a home equity loan instead. The
reasons include the fact that the interest on a 401(K) loan is not tax
deductible, and that the borrower loses the ability for his or her investment to
compound over time. If you have borrowed the money, it can’t earn interest and
the cost over twenty or thirty years could be dear. In addition to those, there
are other reasons why a home equity loan would be a better source of
consolidation funds.
The 401(K) loan is tempting. There is no credit check, the interest rate is
usually favorable, and you are paying the interest back to yourself. The
additional disadvantages are considerable, though. The money you borrow from
your retirement account was money invested before taxes. The money you pay back
is after-tax money, effectively increasing the amount that has to be paid back.
Worse, should you lose your job, the 401(K) loan must be paid back immediately,
in full. Should this not be possible, the loan is treated as a distribution,
requiring the payment of a 10% penalty in addition to state and Federal taxes.
With the job market still rather volatile, the additional risk of borrowing
against a retirement account is substantial.
Borrowing against a tax-deferred retirement fund is rarely a good debt
consolidation option. The tax disadvantages, the threat of penalties and
immediate repayment and loss of compounding generally make such a loan a bad
idea. Those with existing student loans should probably keep them; the interest
is tax deductible and the rate is still lower than with most other consumer
loans. For most anyone else, a home equity loan would be a better choice,
offering deductible interest, fewer risks, and a fixed repayment schedule.
Anyone considering a consolidation loan should consider all of these options
carefully, as the cost of choosing poorly could be great.
About the Author:
©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro
Marketing, a firm devoted to informational Websites, including http://www.End-Your-Debt.com,a Website devoted to debt consolidation information and http://www.HomeEquityHelp.net,a site devoted to information on home equity loans.
|