How To Use a 401k as Collateral

Your individual 401k fund is a retirement fund that you save while you are still employed. In some cases an employer can also contribute to your 401k fund through a percentage of your salary that had been established previously. It is a fund that you can use for your retirement and also a fund that you can use for emergency. When you need immediate cash you can use your 401k as collateral to make a loan.

  • Using the 401k as collateral for your small loan is processed almost just like an ordinary loan. The difference is that the loan can be used for any purpose and you do not need to have a good credit standing and a regular income to qualify for a loan. Also, the principal and interest are returned on your 401k.
  • Determine how much fund you have in your 401k and the amount of loan that you are going to apply for. Talk to a 401k advisor on how to go about applying for a loan with your 401k as collateral. Know that there is a penalty imposed on early withdrawal of retirement funds. The penalty is ten percent for early withdrawal. You also have to consider the tax that you have to pay for the amount of withdrawn funds.
  • Learn the loan processing requirements imposed by the company that handles your 401k fund. Different companies have different methods of processing loans. You have to learn the terms of the loan and acquire the necessary paperwork. A 401k loan can be used to buy a primary home, pay educational expenses, home repair after a calamity, for funeral expenses and to pay medical expenses.
  • Fill up the form and submit it to the financial advisor handling the 401k funds in your company. The financial advisor will tell you if all the form is complete and the necessary paperwork is complete. He will then begin processing your loan application.
  • If you have several 401k funds, consider consolidating them into one retirement fund. This will ensure that you can apply for a larger loan.
  • You can have a maximum of five years to repay the loan. If you used the loan to buy your own home, payment for the loan may be extended from ten to fifteen years. Loan repayments can be made monthly or quarterly. The interest rate is very favorable to you. Depending on the company handling your account, the interest rate is only about one to two percent. As a 401k fund is subject to IRS guidelines, you should repay the loan promptly to avoid penalties that will be imposed by the IRS.

Pay the loan amortization on time so that you will gain a good credit rating. This will be helpful in the future when you need some funds again that will require you to apply for a loan. It may not be against your 401k this time but a good credit rating will pave the way for securing a loan from qualified lenders and banking institutions.


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