Talk me out of a 401k loan

That’s how I’ve always felt… but you are paying yourself back, with interest…

So you still have it when you retire…

So I guess it’s a gamble if your return minutes the interest rate is lower than the rate you would get in a traditional loan.

For one thing the interest you pay yourself is taxed on your paycheck and yet usually goes into pretax bucket. So it gets double taxed.


Yes it can be an easy place to borrow money and it doesn’t go on your credit report. But if you leave your job you can be screwed by the loan becoming taxable (and maybe penalties if under 59.5).

If your retirement savings are already lower it can screw your long term savings.

Don’t set yourself back on compounding interest. It’s always a bad idea.

Vehicles are depreciating assets. If you are going to take a loan on anything at least make it be something that will hold its value.

Because if you ever start viewing retirement assets like a 401k as "available" (before you start taking it), you'll never reach your retirement age with enough money to live on.

Money borrowed from your 401(k) stops earning compound interest and market gains. Even if you repay it, you’ve missed out on potential growth during that time—especially if the market performs well. You repay the loan with after-tax dollars. Later, when you withdraw in retirement, you’ll pay taxes again on that same money.

Use 401k contributions only as a last resort unless you're "boxed in" and have no other alternatives. That'd go for all retirement assets (unless maybe you had a ROTH IRA, but then it's the same principle, although that'd not be a taxable event.)

Alternatives if possible:

1st...Manage expectations. Set a budget. A "vehicle" doesn't need to be a $50k Dodge Charger R/T! Our kids first cars were our old Toyota Avalons. Safe. Reliable. Worked just fine at that point. Any used cars in the family you could use or buy?

Dealer options? They may offer 0% APR or rebates on certified pre-owned vehicles.

Don't favor using loans for depreciable assets like a car. Instead, if your timeline is "about a year", could you start a dedicated auto fund now in a high-yield savings account or short-term CD?

Not enough time? Then look into maybe a Home Equity Line of Credit (HELOC), which go for around 6-8%.

Best Used Cars

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Taking $20,000 from your 401k now is going to be equal to taking away $100,000 or more from your 401k in 20 years. It removes a shite ton of compounding ability long term.

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Don't you pay that loan back through your normal 401K contributions? If so, then you also sacrifice what could be a few years of contributions.

My parents couldn't afford a car for me, or themselves for that matter, so I had to work it out myself. It won't kill him, and you can still help him do that.

Touching a 401k for the purchase of a depreciating asset is a no go imo.

I had to take out a 401k loan about 5 years ago as a sort of bridge loan to buy out a business partner but it has paid itself back many times over.

Even then I would tread with caution as the risk of retirement $ loss linger overheard like a dark cloud.

Every case is unique but I would advise against buying a car with a 401k loan.

If you have to pull out of your 401k to buy a vehicle, you can’t afford the vehicle.

Buy what you can afford or find alternate means of transportation.

As others have said, the 401k is a retirement account it is not a savings account for buying things you want. You need to understand the tax implications of pulling money out. If you’re under 59 1/2, you will pay a 10% penalty in addition to your tax on the distribution. Also, you need to be clear on your repayment of the loan. Do you get company match on your contributions? Your deductions will go 100/% to loan repayment. This is a bad idea. Why not pay for the car out of your savings or finance it?