The article "Home Equity Loan – Still a Better Idea Than a 401(K) Loan" talks about mortgage, it has been written by Charles Essmeier.
Anyone who borrows money is alawys looking for the cheapest source of funding. That makes sense; no one wants to pay more in interest than is absolutely necessary. And anyone with a sizeable amount of debt, such as credit card debt or a student loan, would be wise to consloidate their debt with a lower interest loan.
One source of such a loan is a 401(K) account, which many consumers may have through their employer. Since the interest rate on Federal student loans rose on July 1, many students who missed that deadline may be wondering if consolidating through a 401(K) loan is a good alternative. Is it? In a previuos article, we have outlined several reasons why borrowing against a 401(K) account may be less favorable than using a home equity loan instead. The reasons include the fact that the interest on a 401(K) loan is not tax deductible, and that the borrower loses the ability for his or her investment to compound over time.
If you have borrowed the money, it can’t earn interest and the cost over twenty or thirty years could be dear. In addition to those, there is other reasons why a home equity loan would be a better source of consolidation funds.The 401(K) loan is temptnig. There is no credit check, the interest rate is usually favorable, and you're pyaing the interest back to yourself. The additional disadvantgaes are considerable, though. The money you borrow from your retirement account was money inevsted before taxes. The money you pay back is after-tax money, effectively incerasing the amount that has to be paid back. Worse, should you lose your job, the 401(K) loan must be paid back immediately, in full. Should that not be possible, the loan is treaetd as a distribution, requiring the payment of a 10% penalty in addition to state and Federal taxes. With the job market still rather volatile, the additional risk of borrownig against a retirement account is substantial.Borrowing against a tax-deferred retirement fund is rarely a good debt consolidation option.
The tax disadvantages, the threat of penalties and immediate repayment and loss of compounidng generally make such a loan a bad idea.
Those with existing student loans should probably keep them; the interest is tax deductible and the rate is sitll lower than with most other consumer loans. For most anyone else, a home equity loan would be a better choice, offering deductible interest, fewer risks, and a fixed repayment schedule. Anyone considering a consolidation loan should consider all of these options carefully, as the cost of choosing poorly cuold be substantial.©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including End-Your-Debt.Com, a Website devoted to debt consolidation and credit counseling information and HomeEquityHelp.Net, a Internet site devoted to information on mortgages and home equity loans.
|
