Location: USA
My last job was barely paying me enough to get by and when I had a health issue last year I fell several months behind on my mortgage and other bills. That medical issue has since been resolved so I am no longer falling further behind but I am also not catching up.
Things are starting to look better though because I have recently gotten a new job which should pay slightly more (starting hourly rate is barely higher but overtime is more likely) and it should vastly reduce my expenses (cheaper and better insurance along with a company provided vehicle and gas). In addition it is going to be a far more secure job in the comming economic crisis. Honestly, it’s also looking like my dream job. However this new job requires me to purchase many of my own tools. There is a tool stipend but it accumulates hourly and only pays out quarterly so I will need to front my own tool costs to start with. The problem here is that even the cheap tools are going to cost me about $1000 and if I want a set of tools just good enough that they aren’t an active hinderance I’m looking at closer to $2000. I currently have no money which isn’t allocated to bills that I am already behind on.
It seems like a simple solution would be to take out a loan from my 401k. Right now I could take out a maximum loan of a bit over $6,000. $5,000 would be just about the perfect amount to catch up on all of my bills and buy the tools needed to do my new job. If I set it at a 5 year repayment term then the monthly repayment is under $100 which I should definitely be able to afford with my new job. I could go with a shorter repayment plan but my thinking is that without knowing exactly what my finances are going look like, I want to have the smallest required payments and just plan to pay it off early if my finances are where I expect they will be even if that means I pay a bit more in interest.
At the same time I don’t like the idea of taking out a loan to pay off debts that aren’t charging me any interest. My bank isn’t forclosing on me yet and, considering I am still paying them every month, I doubt that they will. My medical bills may go to collections if I let them sit much longer but there aren’t any late fees and I can always pay off the collections company as I get money. Just looking at the money it almost seems like the more financially sound long term plan would just be to choose to fall a bit farther behind on my bills now to buy my tools and then catch up on those bills later. My credit is already trash and will be for a while. But I also already own my home, have no plans of moving, and tend to buy dirt cheap used vehicles with cash, so I don’t really need a good credit score right now or anytime soon. So my late bills really aren’t doing anything but causing me stress right now. Does it really make financial sense to start paying interest on a loan just to get rid of that stress?
At this point I am heavily leaning towards taking out the loan. But I can’t help but feel that I’m going to be paying a whole bunch of money in interest just to feel more secure. I’ve also never taken out a 401k loan before. So should I take out the 401k loan or just temporarily fall even more behind on my bills? Also if I should take out the loan is there anything I need to know about 401k loans or any pitfalls to watch out for?
Is the 401k plan from your previous employer? I’d first check if your plan admin will let non-active employees take loans out. Otherwise, if it helps your decision, the interest accrued from a 401k loan goes back into your own account, so it’s like you’re paying yourself interest. The main pitfall would be making sure you can pay it back on the agreed upon schedule, otherwise you get penalized. Also, while your money is removed from the market, you’re technically losing out on potential growth, but sounds like you’d benefit more from having access to the money now.
Honestly, if it were me and it would set me up for a career and I probably would do it and just make sure to contribute as much as I can to my retirement once I’m able to. Some alternatives would be a credit card or retailer with a fixed fee pay-over-time feature or a 0% interest intro offer. Failing that, you may just to get creative (sell things, pick up some side gigs, etc.)
Thank you for your advice. That helped a ton. Assuming that they let me I will be going through with the loan.
It is from my previous employer, however the allowed loan amount is already based only off my vested balance. So I’m not sure why they wouldn’t. But I will ask.
That is excelent to know! Thank you. So it sounds like I’d effectively just be contributing a bit extra to my 401k for a few years. That does make all the difference in my decision.
At less that $100 per month I shouldn’t have any issue making the payments. I could probably even make those payments on my old income after things got sorted out.
Honestly I’m not picturing the market being in the best shape for a bit anyways considering the current US political situation. But even so that’s a good point and with that in mind I’m going to try and pay it off as early as I can. I would definitely benifit from having the money now though.
That’s going to be my plan going forwards. It’ll be a few months before I get access to my new 401k plan but I always try to put as much in as I can. I figure I can always cut back on my contributions later if it starts looking like I will have plenty in there.
Unfortunately a fairly recent bankrupcy and my current credit score means I have basically no credit options other than my 401k right now. I also don’t really have anything I could sell. But I have been looking at side gigs. My old work schedule made those tricky but I can probably do some side gigs with the new job if I don’t wind up working too much overtime.