Car loan vs 401k loan?

[dadto2]

The opportunity cost on a 401k is a killer. The better your 401k is doing, the more you should avoid a loan against it. You realze zero growth on the amount you borrow.
On the other hand, with a car loan you may be paying 6%, but inflation means the money you repay in the future is worth less than the money you borrowed today.
I would never borrow from my 401k unless it was an absolute (and I mean absolute) emergency.

 

[Hirev]

I took out two auto loans on my 401K over the years. No regrets for me. Typical front loaded auto loans are a rip off.

 

[MRC01]

... 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.

It does make sense. There is a point where it's cheaper to borrow money than to pay cash, because of the opportunity cost of that cash (if you use it to pay for car, it's not earning investment returns for you). That point depends on several factors including the interest and tax rates that you pay, what you would do with the money if you weren't spending it on a car, and your personal assessment of risk.

For example if you get 0% financing, that's an easy no-brainer, free money, cheaper than paying cash. Same with borrowing at 1% or 2%. On the other side, borrowing at credit card rates or even at 10% is a clear "no". Anything in between is not an automatic decision, requires considering various factors.

 

[z71bill]

Short circuit the situation to a simple question.

If you could borrow money at 5.5% and invest it and earn 16% would you do it?

Taking the CU loan at 5.5% so you can keep earning 16% on your 401k for the obvious win.

 

[Vil_Riker]

If the market crashes, you will feel like a genius for taking a 401k loan. If it continues to climb you will kick yourself for limiting the return.

Pick your poison.

 

[Jerrysends]

I would never do a 401k loan. My strategy would be to save up a little more than the $10k, and buy a used $15k ish vehicle. Lots of great options for that price point, especially if you can maintain it yourself.

You are on the right track talking to a CU over a bank if you do get a loan. The loan rates are typically much lower.

I did a 2011 328xi e90 with 35k miles for $13k last year. I budget $100/mo For maintenance & find I am doing maintenance items early. Insurance is much less because it's not new.

Cars are depreciating assets, new is almost never a good investment.

 

[PandaBear]

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.

What if you roll some of that to IRA then borrow from IRA instead of 401k?

As other have mentioned. You would never know how your 401k / IRA portfolio do ahead of time and whether you are winning or losing your potential gain or opportunity cost if you take out a loan.

 

[nickaluch]

I don't have a active employee 401k account to borrow from but if I did I would not borrow from it.

 

[PWMDMD]

Many times 401k loans have very specific criteria for loans and I'm not sure car loan was one of them but I'd check with HR.

 

[andrew_j]

Why make life so complicated.

Take a regular loan so you see the actual pain of your financial choice and are motivated to pay it back sooner.

401k your last resort if you about to become homeless to pay a mortgage. Don’t waste your lifeline with overbuying a depreciation asset like a car

 

[supton]

I don't think what it's for matters--you can borrow and not give a reason. When I did, I just took it out. I don't recall giving any reason. Now if I wanted to have a 10 year loan and it was for buying a house, then I would have to spell that out (somehow).

After thinking about it, my opinion is, for a short term loan, particularly if the amount is say single digit % of your 401k, then it's low risk. In my case I took nearly the limit out to buy my current house. I needed the cash for 24 hours as a bridge. I had the loan for about 4 weeks total. But it was less than 15% of my 401k? so if the market did anything large... it wouldn't have mattered.

Life can throw curve balls but I think taking a 401k loan for a long term does veer into the "not a great idea unless necessary" area. But if it's a short term way to get cash today ahead of cash you know you will have tomorrow, maybe it's just one of the more acceptable risks to take in life.

 

[gfh77665]

If the market crashes, you will feel like a genius for taking a 401k loan. If it continues to climb you will kick yourself for limiting the return.

Pick your poison.

Thats what I was saying on the previous page. He can actually make money if the market declines. I would say its a 50/50 chance at this point. After two big years of gains its due for a reset, IMO.

 

[z71bill]

I opened an IRA in 1981 with $1,000. I then quit my job and went back to school to get an MBA. The next job I got had a 401K plan so I never contributed to the IRA again. I rolled it over to a ROTH IRA in 2008 or 9 when the balance was way down because of the financial crisis and my income was also lower so I didn't have to pay much tax on the rollover.

As of today it is a little over $50,000. Tax free withdrawals.

I recall when I opened it I was 23 and I said when I take the cash out I am going to buy a new car! Now I am pushing 67 and sort of like my 18 year old Tahoe Z71 4x4.

Start Investing for retirement when you are young - don't mess with your retirement savings because ---

Not having any money when you are old would be brutal.

Being young and poor is bad - I know because I was - but imagine being 70 and having to decide between food and your medication.

 

[z71bill]

Thats what I was saying on the previous page. He can actually make money if the market declines. I would say its a 50/50 chance at this point. After two big years of gains its due for a reset, IMO.

So use a 401K loan to time a market crash? Brilliant why didn't I think of that?

Why not take out a 401K loan and buy put options on QQQ - or invest in a 3x leverage bear ETF!

I am not saying a little gambling in the market is a bad idea - I do it myself with small amounts -

But you don't do market timing plays with your 401K -

The 401k - and most retirement savings is long term focused - short term / timing the market and retirement savings are not compatible.

.................................

 

[JeffKeryk]

Start Investing for retirement when you are young - don't mess with your retirement savings because ---

Not having any money when you are old would be brutal.

Being young and poor is bad - I know because I was - but imagine being 70 and having to decide between food and your medication.

Best advice ever. Lack of money scares me.

 

[CarbonToast]

My opinion, if you have the cash flow(wages):
- take the credit union loan with as small as downpayment as you need
- leave your capital in the market working
- pay 10-20% over the monthly payment to get ahead of the interest curve

The idea is to use your credit and cash flow for the car. Preserve your capital in the market, mainly becuase it earns compound interest.

 

[gfh77665]

So use a 401K loan to time a market crash? Brilliant why didn't I think of that?

Why not take out a 401K loan and buy put options on QQQ - or invest in a 3x leverage bear ETF!

I don't know why people respond with snark like this. I never said anything of the sort. I answered the OP's question directly, instead of travelling off in random direction. He COULD do well if he repays a loan back to himself in a lower priced market. Thats a mathematical fact.

Its not suggesting he "market time" by any stretch. Its the examination of one distinct possibility that could easily happen. Be really brilliant and try to comprehend what you read.

 

[nwjones18]

Do you loose interest on what's withdrawn from the 401k? if so real life interest could be well over 10%.. IMO 401k loan is a bad idea 100% of the time unless its to put food on the table. Total last resort.

 

[rijndael]

Do you loose interest on what's withdrawn from the 401k? if so real life interest could be well over 10%.. IMO 401k loan is a bad idea 100% of the time unless its to put food on the table. Total last resort.

Some say there's a double tax being paid on the interest you pay back to the 401K.

Loan payback: One $10,000 payroll-deducted after-tax payment. $13,333 in gross earnings needed to realize the $10,000 after-tax payment resulting in $3,333 in taxes attributable to the payment.

Distribution of this $10,000 at retirement: $10,000 taxed at 25 percent resulting in $2,500 in taxes.

The total taxes paid on the $10,000 used for the 401k plan loan and then distributed at retirement are $5,833 (58 percent), more than double the amount of $2,500 (25 percent) that would be paid on a $10,000 distribution at retirement.

 

[SC Maintenance]

Do you loose interest on what's withdrawn from the 401k? if so real life interest could be well over 10%.. IMO 401k loan is a bad idea 100% of the time unless its to put food on the table. Total last resort.

Correct. The borrowed money is no longer invested and no longer appreciates. The investment is you - for whatever you spent the money on. The appreciation is the interest you pay. The money can't be in two places at once.