Posted by Lending Club :: April 3, 2008 @ 6:25 am

Borrowing money from a 401(k) retirement account is an option for many people, but not a financially smart one. There are many downsides to borrowing against your 401(k), and now we can add another to the list: Lending Club can get you the money you need, so you have a better option than borrowing from your 401(k).

The main downsides of borrowing against your 401(k) are as follows:

• Taking money out of your retirement account stops it from growing. Without a pension, you’ll be dependent on your 401(k) in retirement. The power of the 401(k) is that your money has time to grow and compound interest. Just as starting as early as possible can have huge benefits, taking money out can have disastrous effects
• Some 401(k) plans don’t allow new contributions until you have repaid everything you’ve borrowed, further reducing the possibility for growth
• You have to pay interest on the loan, just like every other loan. Granted, the interest you pay does go back into your account, but that means that payments will be about the same as with other loans
• You have to repay the loan with after-tax money, even though the money was put in there pre-tax. So if you borrow $10,000 and are in the 25% tax bracket, you’ll have to earn $13,300 to have the $10,000 after taxes to repay the loan. You’re taxed on the money as you replace it, and you’ll be taxed again when you withdraw it in retirement
• Repayments come out of your paycheck, further reducing your take-home pay. As a result, you may be tempted to cut back on new contributions while you repay the loan. Again, taking time off from contributing can have a significant negative impact on the size of your account at retirement
• You have to repay the borrowed money within 60 days if you lose (or leave) your job. If you cannot repay in that time frame, you’ll get hit with a 10% penalty and a potentially huge tax bill. Quickly repaying a large loan without a job is extremely difficult

Compare all of those negatives to a superior option: a peer-to-peer loan from Lending Club. Loans at Lending Club allow your retirement saving to continue to grow. Interest rates start at 7.88% for those with excellent credit, which is in the same range as interest on 401(k) loans. Your Lending Club loan isn’t tied to your job. You’ll have a full three years to repay the loan, regardless of your employment situation.

Borrowing money against your 401(k) is an option that should only be used in the direst of circumstances. There were times when people didn’t have much choice but to borrow from their 401(k) plans. Luckily, now you can use Lending Club when you need money, which lets your 401(k) do what it was designed to do: grow undisturbed until retirement.