The Opportunity Cost of a 401(k) Loan
Notably, 401(k)s make a tempting borrowing option because they don’t require you to pass a credit check and the loan interest goes back into the borrower’s retirement account rather than to a lender. But when employees fail to repay the loans—or when they reduce or eliminate their 401(k) contributions while repaying the loans—401(k) borrowing becomes much more costly than it appears on the surface.
Example of a 401(k) Loan
Consider a 30-year-old employee, Zoe, who borrows $20,000 from her 401(k) to make a down payment on a house. Buying a house is widely considered a smart financial decision and is one of a few reasons to borrow money that even the most conservative financial advisers don’t balk at.