Borrow from 401K to payoff High int Car debt?

[charger71]

Newbie here,
I'm 48 and recently discharged from a chap. 7 (2-1/2 years now).
I bought a car 6 months ago to re-establish credit, $21,000 @ 14.4%.

My question is, should I BORROW from my 401K @ 7% to pay off the car @ 14.4%?

I can still contribute to the 401K with a 6% company match so I'll continue to save and by "borrowing", I do not have to pay IRS penalties so the 7% interest is what I'm charging myself.

Other than the car, I have zero debt but I'm trying to buy a house to get away from high apartment rental and get some tax relief (being single).

Is this prudent? Without the car note, I can afford a $115,000 home vs. a $65,000 home. By the way, my 401k is down 5% ytd.

Any help appreciated, as I seem to screwup when it comes to financial maters!

[JBL]

I would suggest that your car is a bit too expensive. You can re-establish credit with a $12,000 car as well as you can with a 21,000 car.

That being said, it is really not a good idea to raid your retirement account, especially to pay for a depreciating asset like a car. Maybe if you are about to lose your home to forclosure as a last ditch effort to save it it would make sense to raid the retirement account. Especially at your age, it really doesnt make sense. Yes, you are paying yourself interest, but if you lose your income you are stuck with less retirement savings.

I would suggest that if your credit has improved, try re-financing into a cheaper loan, or trade in your car for a cheaper one with a lower loan balance and lower interest rate. This may not be possible if you are "upside down" on the car loan.

Another thing with mortgage amounts. Does the bank say you can afford a 65K loan or have you determined that the payment on a 65K loan would fit your budget? What the bank says you can afford and what you can actually afford can be very different numbers. Usually the bank number is higher than what you can afford.

good luck!

[charger71]

Your correct, the car cost more than I was willing to pay, but I was coming off 5 years of chapter 13 and converted to 7. I was happy that anyone would let me have a car loan. Anything to get me out of "debtors prison".

My car loan obligation is $440/month for 76 months, but I've been paying $600+/month to reduce the terms & int.

As for the mortgage,
I was pre-approved for $115,000 (that's what I asked for) but they said I could go 22% higher. With car loan, I'm comfortable with $70,000 mortgage in order to continue saving, without car loan, I would finance $115,000 and still have room to save.

[sweeps]

I agree with JBL. Buying an expensive car with a 14.4% loan is not a good way to re-establish credit.

I would not borrow from my 401k. I would just aggressively try to pay off the car -- refinance to a lower rate if you can. How your 401k has performed recently is not relevant. If anything, taking money out of your 401k while its down is the worst time to do it.

Don't believe the pre-approval number. What the mortgage company says someone can afford is usually a lot more than they really should be borrowing. I would hold off on buying a house for now.

[disneysteve]

Welcome.

Sorry, but without knowing any more about your situation, I have to say it doesn't sound like you are on the right track financially quite yet. You are recently out of bankruptcy but bought a car that you admit cost more than you were willing to pay (so why did you buy it?). Then you financed it for over 6 years which further emphasizes that it was more than you could afford.

If it is possible to get close to what you paid for the car, I'd sell it and buy something much more affordable.

Should you borrow from your 401k? Absolutely NOT! It is a bad idea in virtually all circumstances and this is no exception.

As for buying a home, tell us about your savings at this point. How large of a down payment do you have set aside? How large of an emergency fund have you built up? How much free cashflow do you have each month after paying all your bills? What % of income are you putting into the 401k?

If you are willing to post you income and expense info, we'd be able to really get into some nitty-gritty advice.

[LuxLiving]

Is this how it goes guys? You put the money into the 401-K tax free and then you borrow and when you pay yourself back it's with after tax money. Then when you retire and withdraw you're taxed again. Seems a little steep to me!

[charger71]

Your right, the car wasn't the brightest idea but I had to ditch a vehicle that was paid for for at least 6 years. A person that files chpt 7 with a repossion isn't really in the drivers seat. That's the only deal I could get with a dealer I've dealt with for over 20 years. Having said that:

That's why I'm here asking for advice, I usually want to do the opposite of what I would normally do because I just can't seem to get it right.

I'm single and bring in about $64k/year and I'm way behind in the retirement game. Late bloomer...

I have 100k in one IRA from previous employer.
27K in current employers 401 whick I can borrow 50% from.
Contribute 6-10% with 50-50 match up to 6%.
5K in high yield savings.

I was hoping to use the 5K for emergencies and moving expenses and get a house with close to nothing down, seller pay closing costs.

The car loan has helped my credit, currently (680 FICO).

I managed to pay the car down from 21k to 19K in 6 months @ 14.4%

I tried to be analytical about this to reduce my generally poor judgement
Let me try to explain..

Borrow 13k from 401 @ 7% = 267/month for 5 years ttl- $17,242
Invest 167/month ($440 orig payment - new $267/month) = $10,700 in 5 years @ 6% yield.
Paying off 13K car loan = 8K in interest savings.

Leaving 13K in 401 @ 6% earnings =15,600 in 5 years.

The way I see it, right or wrong, I dunno... If I leave 13k in the 401 @ 6%, in 5 years I would have 15,600.

Borrowing now, in 5 years I would have saved 8,000+17,242+10,700=$35,942. $35,942-$15,600=$20,342

If I pay the car off, I would have the option of selling and trading down and re-investing the difference.

It sounds too good to be true and it defies all the rules that I'm trying to abide by. That's what has me stumped....

LuxLiving made a good point, I'm losing 25% just to repay the 401 loan....
That's good advice, as well as ditching the car as suggested by JBL, Sweeps & Disney.

I don't have many working years left and I need to make the most of it.

Postpone the house with the tax incentives associated and aggresivly pay off or trade the car? Is that the general concenses?

[JBL]

Or look into refinancing. 14.4 percent is a lot to pay on a car loan. See if you can possibly get that bumped down. Are you a member of a credit union or could you join one? They are frequently willing to offer loans with better terms/rates.

Especially with the housing market being depressed right now, I would not plan to buy a home with no downpayment. This means that you have no wiggle room if you lose your job and cant make the payments and the house has lost value. If you have equity in the house you can sell at a loss if you really have to.