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Bourre
New Orleans Saints Fan
Da Parish
Member since Nov 2012
18005 posts
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Update- What is the better option to secure a loan, the bank or borrowing from 401k?

We’ve never had to get a loan before except for a mortgage loan so I’m not sure what our best option is going to be. We need between 35-45k for a new roof and are trying to figure out if the bank is the best option or borrowing against my 401k. Any help is appreciated, we obviously wasn’t planning on having to get a new roof by the end of the year.
This post was edited on 11/21 at 5:27 pm


LSUtigerME
LSU Fan
Walker, LA
Member since Oct 2012
3453 posts

There’s a lot of options.

HE Loan, HELOC, or just a regular loan secured by your assets (for example through LightStream).

Borrowing against your 401k is *usually* a bad option except in very specific circumstances. Some companies allow you to simply borrow against the value, pay yourself interest, the money is never removed from the account, and contributions continue. This is rare, and the only really ideal scenario. Typically, one or multiple of those restrictions will fall on your account.


Civildawg
Mississippi St. Fan
Member since May 2012
6843 posts

45k to redo a roof? Jesus


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240
MMauler
Member since Jun 2013
18656 posts
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quote:

Borrowing against your 401k is *usually* a bad option except in very specific circumstances.


It's usually a bad idea because you are losing out on the increase tax deferred earnings. The way things have been the last year, it would have been MUCH BETTER for you to have taken out the 401K loan because you wouldn't have lost the 15-20% many of us have lost in the market this past year.


LSUfan20005
LSU Fan
Member since Sep 2012
8541 posts

How bad is the roof? I also need a roof, but I’m inclined to wait for hail.


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80
good_2_geaux
LSU Fan
Member since Feb 2015
625 posts

It is my understanding (not personal experience) that some of the “larger” roofing companies offer financing. May want to ask when you get your quote.


Im4datigers
LSU Fan
Northern Virginia
Member since Oct 2003
3883 posts

$45k for a roof. What you need are some 2nd, 3rd and 4th quotes.

I have a 4200 sf house and just paid $18k for mine in NOVA


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141
Paul Allen
California Fan
Montauk, NY
Member since Nov 2007
71836 posts

quote:

would have been MUCH BETTER for you to have taken out the 401K loan because you wouldn't have lost the 15-20% many of us have lost in the market this past year.


Aren’t you paying the loan back with interest?

I guess you’re buying more shares at a cheaper price?


Turf Taint
LSU Fan
New Orleans
Member since Jun 2021
4846 posts

Good points above on bad reasons to pull from 401k.

One more...
You are foregoing the return on your 401k across the period of the loan and for the borrowed balance, likely at a time in your life when that return otherwise would have yielded greater return (ie, by the time you retire) than the bank interest rate costs of the loan.

P.S. $45k roof costs, wow!



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MMauler
Member since Jun 2013
18656 posts
 Online 

quote:

Aren’t you paying the loan back with interest?


Yes. BUT, you're paying the interest to YOURSELF.

The biggest negative of that is that you are essentially turning after-tax dollars (the interest you pay is money that's already been taxed) into "pre-tax" dollars because when you take that money out, it will be taxed AGAIN as ordinary income.


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gpburdell
Georgia Tech Fan
ATL
Member since Jun 2015
1177 posts
 Online 

quote:

The biggest negative of that is that you are essentially turning after-tax dollars (the interest you pay is money that's already been taxed) into "pre-tax" dollars because when you take that money out, it will be taxed AGAIN as ordinary income.


https://thefinancebuff.com/401k-loan-double-taxation-myth.html


Paul Allen
California Fan
Montauk, NY
Member since Nov 2007
71836 posts

If it’s a myth then what about the advantages of buying shares at a lower price (with each loan payment) since the market has been down this year.

Would this in and of itself be a great advantage?


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04
thelawnwranglers
LSU Fan
Member since Sep 2007
35163 posts

401k loan consideration - if you leave your job you have to pay it back or it's treat like early withdraw subject to 10% penalty


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slackster
Stanford Fan
Houston
Member since Mar 2009
78996 posts

quote:

It's usually a bad idea because you are losing out on the increase tax deferred earnings. The way things have been the last year, it would have been MUCH BETTER for you to have taken out the 401K loan because you wouldn't have lost the 15-20% many of us have lost in the market this past year.


In hindsight, sure, but is it a good idea to take a loan, or essentially sell assets, when they’re already down 20%?


Paul Allen
California Fan
Montauk, NY
Member since Nov 2007
71836 posts

You’d think that in a down market your 401k loan payments are buying more shares than you would in a high performing market.

Wouldn’t your 401k loan payment have more buying power when the market is down?


FlyingTiger1955
LSU Fan
Member since Jan 2019
5691 posts

The bank. The 401k is for retirement and should be left alone.


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50
Sterling Archer
LSU Fan
Chicago
Member since Aug 2012
5681 posts

Name and shame. What company wants to charge you $45k for a roof?? Assuming you have a normal non-ot baller sized housed.


slackster
Stanford Fan
Houston
Member since Mar 2009
78996 posts

quote:

ou’d think that in a down market your 401k loan payments are buying more shares than you would in a high performing market. Wouldn’t your 401k loan payment have more buying power when the market is down?


But you sold all those shares while they were down for the loan in the first place, at least for the majority of loans I’ve seen.


Paul Allen
California Fan
Montauk, NY
Member since Nov 2007
71836 posts



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castorinho
LSU Fan
13623 posts
Member since Nov 2010
79206 posts

quote:

But you sold all those shares while they were down for the loan in the first place, at least for the majority of loans I’ve seen.

MMauer's original premise is that in hindsight, it'd have worked out had you taken out a loan before the dump.


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