To Pay Off Or Not To Pay Off

questions · #1 (**permalink**) 12-28-2006, 04:23 PM

We have a $24K loan with my husband's 401K plan. He has $78K in it, including this loan. The loan is at 10% interest. We can sell a piece of land we have and add a few thousand from one of our savings accounts (which is at 3% interest) to pay off his 401K loan. Once we pay this loan off, we will gain close to $800 a month back into the household to dedicate to our credit card debt of $42K. All but one credit card ai at 78% while one is at 9% interest. We have an annual income of around $120K. My husband is 45 years old and I am 42 years old.

Is this a smart plan? Should we proceed with this endeavor?

instantinfo4you · #2 (**permalink**) 12-28-2006, 05:38 PM

I would definitely do this. This will allow you to pay off all your credit card bills? You should definitely FOCUS on only paying off one bill at a time, while making minimum monthly payments on the other bills, This will allow you to pay them off faster in the end, and save thousands if not hundreds of thousands of dollars in interest.I would definitely do this. This will allow you to pay off all your credit card bills? You should definitely FOCUS on only paying off one bill at a time, while making minimum monthly payments on the other bills, This will allow you to pay them off faster in the end, and save thousands if not hundreds of thousands of dollars in interest.

kristinecfp · #3 (**permalink**) 12-28-2006, 05:42 PM

401K loans are risky because most companies require you to pay the loan back in 60 days if you quit or otherwise lose your job. If you do lose your job and are not able to pay the loan back, the balance still owed on the loan will be treated as a distribution, subject to a 10 percent (early withdrawal penalty if you are less than age 59½) on top of the income taxes that you will owe on the distribution.

Given the level of debt you have you should be aggressively paying off all of your debt, but I would place the 401K loan as a higher priority due to the risks involved should your husband lose or leave his job.

instantinfo4you · #4 (**permalink**) 12-28-2006, 06:03 PM

Great advice Kristinecfp!

disneysteve · #5 (**permalink**) 12-28-2006, 06:43 PM

I would focus on the 401k loan first.

1. It has the highest interest rate.
2. As stated, if he were to lose his job, that loan would be due immediately.
3. You are losing valuable time for that money to compound for retirement.

Once it is repaid, don't ever borrow from a 401k again. It is a very bad way to obtain funds for a variety of reason, 3 of which I just listed. The whole "you pay the interest to yourself" argument is a crock of BS. What actually happens is you borrow money that was deposited pre-tax but pay it back with money that has already been taxed. When you retire and draw from that account, you then pay taxes a second time on that same money, which isn't a great thing to have to do.

instantinfo4you · #6 (**permalink**) 12-28-2006, 06:45 PM

I never really thought of it like that. Who wants to get taxed on anything twice? That's just not fair. They shouldn't even let you borrow against a 401k, but know I can see why they do. Very good for them, not so good for you.

creditcardfree · #7 (**permalink**) 12-28-2006, 07:51 PM

I agree with everyone else on paying the 401k loan back ASAP. My only concern is any taxes you might have in selling the land. I'm not saying don't do it, just that it is important to sell with your eyes wide open with all the financial consequences. The taxes may just be worth paying in order to avoid other taxes resulting from not getting this loan repaid.

Are there any other options available to you? Other things that might be sold or other money you could free up by eliminating cable tv, cell phones, low deductible insurance? Just ideas. Good luck.

Budgeteer · #8 (**permalink**) 12-28-2006, 09:43 PM

Is there any possibility of you obtaining a 2nd mortgage to pay off your 401k loan or even better yet consolidate both that and your credit card debt?

traveler · #9 (**permalink**) 12-29-2006, 04:16 AM

Already have a small consolidation loan. So we don't want to get in deeper, in my way of thinking, by consolidating the 401K loan and the credit cards. Honestly, the 401K loan doesn't bother me nearly as much as those awful credit cards. I'm encouraged by the support for this grand plan. We will concentrate on selling this lot in N.Carolina to start this new plan. Our New Year's Resolution!

Budgeteer · #10 (**permalink**) 12-29-2006, 06:22 AM

Quote:

Originally Posted by traveler

Already have a small consolidation loan. So we don't want to get in deeper, in my way of thinking, by consolidating the 401K loan and the credit cards. Honestly, the 401K loan doesn't bother me nearly as much as those awful credit cards. I'm encouraged by the support for this grand plan. We will concentrate on selling this lot in N.Carolina to start this new plan. Our New Year's Resolution!

Well, for sure debt reduction requires you to have the discipline to stop accruing debt; if you refinance onto an equity loan from a credit card, you can't rack up more credit card debt. But an equity loan is deductible, which is a big benefit. And it usually has a lower interest rate, although it kind of sounds like you've got a pretty reasonable rate on your CCs. Anyway, was just throwing it out there. GL with your plan.

disneysteve · #11 (**permalink**) 12-29-2006, 06:35 AM

Quote:

Originally Posted by Budgeteer

Well, for sure debt reduction requires you to have the discipline to stop accruing debt; if you refinance onto an equity loan from a credit card, you can't rack up more credit card debt.

Unfortunately, fully 2/3 of all people who roll consumer debt into home equity debt proceed to rack up more consumer debt and end up worse off than they started, so it can be a dangerous game unless you are absolutely certain your bad habits are behind you for good.

Budgeteer · #12 (**permalink**) 12-29-2006, 10:56 AM

This is true; but if you can't stop spending, you can't stop spending and it's unlikely that you will get out of debt either way. Unfortunately. I guess you could refinance and then destroy your credit cards.

naturalwoman · #13 (**permalink**) 12-29-2006, 12:21 PM

sounds good to me. getting rid of debt? paying things off? sounds great. go for it!

instantinfo4you · #14 (**permalink**) 12-31-2006, 10:19 AM

Stop getting yourself into debt is probably the biggest challange when your already in real far. You don't see a way out, and you keep going further and further into debt.

smartatmoney · #15 (**permalink**) 01-01-2007, 08:20 PM

Take it from someone who has taken out 401k loans in the past (and is 2 weeks from paying off his last one ever). You should pay if off right away. Sell the land. Also, I would not try and consolidate my other debt into the equity in your house.

That would add undue risk to your home. Better to focus on 1 debt at a time. You have a good income.... try and reduce your expenses and destroy this debt as soon as possible. No debts will free up more and more cash to build wealth and prepare for retirement.

-SAM

instantinfo4you · #16 (**permalink**) 01-29-2007, 08:47 PM

That's what I have always heard, is that it's best to focus on one at a time, that way it becomes easier and quicker to pay off the others once you start to pay a couple off.

ericmedem · #17 (**permalink**) 01-30-2007, 04:05 AM

Quote:

Originally Posted by disneysteve

I would focus on the 401k loan first.

1. It has the highest interest rate.
2. As stated, if he were to lose his job, that loan would be due immediately.
3. You are losing valuable time for that money to compound for retirement.

Once it is repaid, don't ever borrow from a 401k again. It is a very bad way to obtain funds for a variety of reason, 3 of which I just listed. The whole "you pay the interest to yourself" argument is a crock of BS. What actually happens is you borrow money that was deposited pre-tax but pay it back with money that has already been taxed. When you retire and draw from that account, you then pay taxes a second time on that same money, which isn't a great thing to have to do.

You are going to be paying off your credit card with money that has been taxed in any case, in one instance you pay off credit card debt slowly using money that has been taxed, then later you pay taxes on your 401k, in the other instance you pay off your credit card debt rapidly with your 401k and pay your 401k back with taxed money, then later you pay taxes on your 401k. I dont really care how you do pay, you are still going to be paying with money that has been taxed, either to your 401k or your card company, and in both instance you will still pay taxes on your 401k at the end.

Eric Medemar

poundwise · #18 (**permalink**) 01-30-2007, 05:24 AM

I say pay back the 401(k) and then hit the outstanding debts will all you have to pay them off asap.

krayziebone33 · #19 (**permalink**) 01-30-2007, 07:15 AM

Pardon my ignorance, but a 401(k) is just a loan?

LuxLiving · #20 (**permalink**) 01-30-2007, 08:59 AM

No krayziebone33, the OP has apparently borrowed from his own 401-K funds which is allowable, but if you get fired then the loan has to be repaid immediately. A 401-K is a retirement savings device supposedly designed for the future and OP has borrowed against it, which at times is cheaper than borrowing elsewhere.

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)