Q: Is it a good idea to borrow from my 401(k)? It seems like I'm paying the interest back to myself, so it seems like a good deal.
Carmen Wong Ulrich: I definitely don't think it's a good idea. There are indirect costs beyond the interest. For example, what happens if you lose your job? Most 401(k) loans are due in full anywhere from 30 to 60 days after your last day on the job. Then, you'd probably have to borrow to pay it off and since you won't have confirmed income, if you can get a loan, you'll pay a much higher interest rate. Trust me—I know too many people who have ended up on a horrible loop of bad loans because they lost their jobs owing their 401(k). Also, the amount you borrow doesn't have a chance to grow—it won't be 'in' the market. That's another cost that adds to the interest, making this loan not so cheap. Instead, head to your local credit union to see if you qualify for a low-interest loan. When it comes to borrowing, always consider the source.
Got a question for iVillage personal finance expert Carmen Wong Ulrich? Email her at homeand.garden@nbcuni.com.
