When applying for a 401(k) loan, you must have a proper strategy in place to pay and repay back as this financial fund isn’t free money. It’s true that the money borrowed belongs to you, but you need to understand that you are borrowing a loan from your retirement’s funds. This amount is a combination of your personal contribution and a portion of the company you are employed with. Ideally the amount borrowed cane be paid back within the first 5 years yet the repayment tenure can extend to 15 years depending on the employer and purpose of the loan. The set rules are laid down by the IRS, yet the plan administrators have a say on it.

To start before applying, you need to figure out how much you could borrow and that depends on the government regulations. Ideally you could take a loan not more than 50% of your account amount. Getting a 100% loan amount is rarely permissible depending on the government and may be a few exceptions. Interest on this loan is no exception and the amount is set by the employer and must match the IRS rules. In case of heavy investments such as home and real estate purchase, the repayment tenure can get extended. Applying for a 401(k) loan must be planned carefully and judiciously as any default can have negative implications in the longer term. Also know that you can apply for this loan yet condition to that you don’t have any outstanding one. This is one loan that does not include the need for a credit check, no worries to pay taxes, get the best interest rates and definitely has balanced repayment terms and regulations. However, you may have to pay a certain amount of fees such as administration and maintenance fees as set by your plan administrator. Ideally you must try to keep the repayment tenure as short as possible to avoid any risks of losing your employment status. Also, have a sustainable budget in place so you don’t miss out any repayments. Your monthly pay checks become a way for automatic deductions towards the payment of 401(k) loan. Now this plan need not be necessarily termed as a loan as there is no account balance against it. Yet while employed, the current employer approves as a loan where you can borrow from, provided you transferred your balance from a former employer to current.

Ideally, this loan is applied to pay back debts, purchase a new house, used for home repairs and improvements, pay medical bills, budget college and tuition fees, and plan for a vacation. You must try best to avoid for luxury and non-essential consumption purposes and focus on important and hefty investment matters. Keep it a serious financial affair, such as down payment and clearing your debts.

The process is fairly simple and you can have quick access to money as it ideally belongs to you. You must consciously judge your intentions before considering for 401(k) loan and keep this as a last resort before trying other alternatives such as personal loan and home equity loan.