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What to consider before taking out a 401(k) loan

What to consider before taking out a 401(k) loan

The average household in America that carries a debt owes a total of $131,431. This includes mortgage debt, and other common obligations include student and auto loans and credit cards The average credit card balance is $15,654 while the average student loan debt is $46,597. Americans have an average auto loan debt of $27,669. One way for Virginia consumers to pay off that debt may be to dip into a 401(k).

However, this may not necessarily be the best way. Prior to taking a 401(k) loan, individuals should consider whether they can get that money from another source. It may also be wise for them to create a budget or otherwise look at what money is being spent on each month. Ideally, they will be able to both cut down on debt and save for retirement at the same time. Cutting spending may make it easier to do both.

It may also be wise to consider the interest rate on a 401(k) loan. If it is lower than the rate paid on a given debt, the loan may make sense. However, if it is higher, it may be better to look for other options. Generally speaking, the interest rate on a 401(k) loan is the prime rate plus an additional 1 percent.

Individuals who are seeking relief from overwhelming debt may be best served by filing for bankruptcy under Chapter 13. This may make it possible to reorganize debts and repay them over a three- or five-year period. An attorney can outline the eligibility and other requirements.