Car loan vs 401k loan?

[Johnny248]

Hello all!

I am considering purchasing a new/used vehicle. Originally I was going to put $10k down, and finance the remainder. My CU rate would be 5.5%. The dealer banks are over 6%. Then I thought about the possibility of taking a 401k loan instead of going through the CU. My thinking was that at least I am paying myself interest instead of a bank. Current rate on the 401k loan is 8.5%. To all of my financial guru's out there, would it make any sense to use a 401k loan vs a standard car loan?

Thanks in advance!

 

[dogememe]

Interesting - following.

 

[Nessism1]

Absolutely! As you noted, the interest you pay, goes to you. Great idea!

 

[Johnny248]

Absolutely! As you noted, the interest you pay, goes to you. Great idea!

The other thing is that my 401k is averaging ~16% over the last year. So I would be earning less interest on the loan amount, and less interested on the lower balance?

 

[gfh77665]

If you have been invested and experienced gains the past few years, its is an awesome idea to utilize your market profits to do this.

If the reverse had been true, if the markets were mired in a down cycle, it would be a horrible idea to lock in losses.

 

[dishdude]

A 401k loan should always be the last resort.

 

[BMWTurboDzl]

Hello all!

I am considering purchasing a new/used vehicle. Originally I was going to put $10k down, and finance the remainder. My CU rate would be 5.5%. The dealer banks are over 6%. Then I thought about the possibility of taking a 401k loan instead of going through the CU. My thinking was that at least I am paying myself interest instead of a bank. Current rate on the 401k loan is 8.5%. To all of my financial guru's out there, would it make any sense to use a 401k loan vs a standard car loan?

Thanks in advance!

https://www.bankrate.com/retirement/borrow-from-401k-calculator/

 

[MRC01]

Market performance is an important factor already mentioned. After the market gains of the past couple of years, I would not worry too much about this, but that is not investment advice and you must decide for yourself.

Another factor to consider is job security. If you lose your job the loan must be repaid in full, else the loan balance becomes a taxable distribution with penalties.

Finally, always consider buying a cheaper car you can afford without taking out any loan at all.

PS: even though you pay the interest to yourself, you're paying with after-tax dollars so it costs relatively more than it appears at face value.

 

[99Saturn]

The other thing is that my 401k is averaging ~16% over the last year. So I would be earning less interest on the loan amount, and less interested on the lower balance?

Key tradeoff to consider there.

Plus what happens if you lose your job, ie need to payback the loan within X period of time.

 

[JoelB]

Oh boy you are going to get a lot of financial "experts" telling you it's the worst thing you can do to take a 401k loan.

Everyone's situation differs. I was able to take a 401k loan in the past to pay off my student loan. The payment was much lower on the 401k loan than the student loan due to initial loan amount. I put the difference in payment towards the loan and was able to pay down the 401k loan faster than I would have been able to pay the student loan.

 

[supton]

I’ve thought about it, but the need to pay back immediately in case of job loss gave me pause. Might be a way to conserve cash, keeping cash on hand instead of tying up. But then why not pay cash… everything has risks, as a short term loan it may be a good move. For a five year I suspect not.

 

[Johnny248]

Market performance is an important factor already mentioned. After the market gains of the past couple of years, I would not worry too much about this, but that is not investment advice and you must decide for yourself.

Another factor to consider is job security. If you lose your job the loan must be repaid in full, else the loan balance becomes a taxable distribution with penalties.

Finally, always consider buying a cheaper car you can afford without taking out any loan at all.

PS: even though you pay the interest to yourself, you're paying with after-tax dollars so it costs relatively more than it appears at face value.

I'm not concerned with Job security, unless my employer hires some person to fire half of the employees lol

I could pay cash for the vehicle, however it makes me nervous to not see money sitting in the various accounts. I'd rather have the extra cash in hand? Not sure if that makes sense. I'm sure it is more psychological than anything else.

I'm not sure what I am going to do as of yet. The idea just came to mind and it seemed interesting to me. Glad to hear from everyone else.

 

[Gyro Gearloose]

Complicated. Lower return on your 401K but probably overall financially advantageous because the payment interest stays inside your financial "closed system". Risky because you are counting on no job status changes for 4-5 years which hardly ever happens. I did it one time but decided never again.

 

[MrGraybeard]

I'm not concerned with Job security, unless my employer hires some person to fire half of the employees lol

You laugh now ...
That said, If you have the cash reserves to pay off the loan if necessary, go ahead. My personal bias is that the stock market will be flat at best over the next couple of years. That said, I haven't cashed out all my equity holdings.

 

[gfh77665]

If the market goes down for a year or two, then the OP could actually gain by buying back in at better valuations.

 

[JTK]

Anyone will tell ya it's not the best financial move.

I think the loan interest rate with my Fidelity 401K is around 10% lately. ~6% is quite good. I've probably done 4-5 loans out of my 401k it the past 28yrs. If I track my rate of growth, they haven't even been a blip on the radar. Obviously this depends on your mix and your balance.

 

[JeffKeryk]

There is another way... Perhaps try making those payments to yourself for 3 years or more. Then go in with cash or a big fat down payment.

Loans are buying money over time. Basically pay all that interest to yourself.

 

[rijndael]

Don't you get in to a double tax territory/penalty with the interest portion of the 401K loan?

 

[TomYoung]

Holy smokes, lotsa plain wrong answers and advice to your question in this chain. If I have this correct, your 401K is returning 16 plus percent and the portion you borrow will return 8.5 or so percent to you. You can get a credit union loan at 5.5%. Know that you are paying both loans back with after tax dollars. Your question is as simple as this: do you want to earn 10.5% or 8.5% on your money? You have layed out all the variables, negated the concerns like losing employment. Borrow from the bank.

 

[TomYoung]

Don't you get in to a double tax territory/penalty with the interest portion of the 401K loan?

Not really. Unless you are stating that you want the 401K to have not acheived full value at RMD time.... which makes no sense.