5. Loan from a 401(k) is best used as a last resort. If you have a retirement plan sponsored by your employer, like a 401(k), you can borrow up to 50% of your balance to pay down debt. Interest rates may be lower than those of other debt consolidation strategies, and there is no need for a credit check. A 401(k) loan typically has a five-year repayment plan; however, if you lose or quit your job, the entire loan amount, including interest, will become due.
If you can repay your 401(k) loan, you will not be required to pay taxes or an early withdrawal penalty, but if you cannot do so, the loan may be considered taxable income.
Cons:Â May reduce your retirement income; subject to taxes and penalties if you cannot repay; becomes due in full if you are separated from your employer; limits on the amount you can borrow; no effect on credit score; fixed repayment schedule for five years.
