You Can Use Your 401(k) for an Auto Loan

Some people choose to use their 401(k) or their 403(b) savings accounts for short term loans such as an auto loan when the need is necessary. You do not have to, and if you can afford to not touch that retirement money it really is in your best interest not to.

However, sometimes the car just won’t last you another few months, in which case you have to see what your best options are, and it may be that borrowing from your future is how it gets done. Some plans are set up that you cannot borrow from them unless you have left that place of employment, but others will allow you to borrow up to 50% or $50,000 of the balance within a year.

However, by using that money you are losing out on interest that you would be making by having that money in there. If the market is low then you would be at an advantage in taking the money out, but if the market it ready for an upswing you could lose out on valuable interest for that car loan.

When you pay interest on a car loan from your account it goes into your account. That rate is based on prime plus one or two percentage points, which at this point in time would put it at 9.25% or 10.25%. However, it is not enough to think about that money in terms of it being yours now, it is your future. You will usually have about five years to repay the car loan, but that is if you stay at your job; if you quit you will have to pay it back within 60 days as a rule.

If you cannot pay it back you have to take it out as a withdrawal and if you are younger than 59 ½ then you are looking at federal and state income taxes as well as 10% penalty on top of that – which should come out somewhere in the nature of 40% of the balance of what you owe.

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