401K Loans are on the Rise

[bjl584]

More Americans take 401(k) loans, an indicator of financial stress (cnbc.com)

[LivingAlmostLarge]

They suggest it's a better alternative to CC

[ua_guy]

Putting this in perspective, the two account administrators from whom they collected data saw the following increases in borrowing:

Empower: 2.3% to 2.6% since last year, up from 1.7% in 2020, or less than 1% in 3 years...
Fidelity: 2.4% to 2.8%, no data since 2020.

As LaL mentioned, borrowing from a 401k is a potentially better alternative than short term borrowing on a credit card since interest rates are as high as 30%. If done correctly, a 401k loan is tax/penalty free and I believe you repay yourself the interest. (Someone fact check me on that, please)

Is it really financial stress, the reason people are borrowing? Yeah, I think so. People can't wait forever to buy homes, cars, or raise their kids. Even though the rate of inflation is strongly down, wages are still struggling to keep up in many sectors and that translates to additional expense in the household budget.

[kork13]

Putting this in perspective, the two account administrators from whom they collected data saw the following increases in borrowing:

Empower: 2.3% to 2.6% since last year, up from 1.7% in 2020, or less than 1% in 3 years...
Fidelity: 2.4% to 2.8%, no data since 2020.

As LaL mentioned, borrowing from a 401k is a potentially better alternative than short term borrowing on a credit card since interest rates are as high as 30%. If done correctly, a 401k loan is tax/penalty free and I believe you repay yourself the interest. (Someone fact check me on that, please)

Yes, it's only a .5-1% absolute increase over the last few years, but in relative terms, it's nearly a 50% jump in the rate... Still, I'll admit that's actually lower than I would have (ignorantly) expected, closer to 5% of accounts.

The repayment to yourself thing is correct, I think they require repayment with a flat 6% "interest" rate, all of which goes back into your account. The real downside in 401k loans (in addition to the risk of penalties if you fail to pay it back on time, or leave your job before paying it all back) is lost growth opportunity. For the duration of the loan, you're reducing the amount that is properly invested & could be earning a higher return than the 6% that you're required to add. Besides, that 6% isn't growth (that you didn't have to work for) .... it's new money, and I believe it's actually after-tax funds, so effectively a double-hit by the time you withdraw.

[ua_guy]

Yes, it's only a .5-1% absolute increase over the last few years, but in relative terms, it's nearly a 50% jump in the rate...

Yep. There are many ways to describe the change. I'd say that phrasing is a little sensationalist.

It's like when a study says Product A will double your cancer risk. Well, if the risk was .000001% before and now it's .000002%, and my actual risk of dying from cancer is somewhere around 30%, I take those claims with a grain of salt (but only in the state of California).

[srblanco7]

Yes, it's only a .5-1% absolute increase over the last few years, but in relative terms, it's nearly a 50% jump in the rate... Still, I'll admit that's actually lower than I would have (ignorantly) expected, closer to 5% of accounts.

The repayment to yourself thing is correct, I think they require repayment with a flat 6% "interest" rate, all of which goes back into your account. The real downside in 401k loans (in addition to the risk of penalties if you fail to pay it back on time, or leave your job before paying it all back) is lost growth opportunity. For the duration of the loan, you're reducing the amount that is properly invested & could be earning a higher return than the 6% that you're required to add. Besides, that 6% isn't growth (that you didn't have to work for) .... it's new money, and I believe it's actually after-tax funds, so effectively a double-hit by the time you withdraw.

One of the risks of a 401k loan is that if you lose your job, I believe that immediate repayment of the loan is required. This could make a financially challenging situation (job layoff) a much bigger issue.