Author Topic: Took loan against 401(k)  (Read 10408 times)

Bearblastbeats

  • Guest
Took loan against 401(k)
« on: September 01, 2017, 08:24:42 AM »
Good day.

I took a loan against my 401(k) to help with my current financial situations. I should be getting back ~$5,600 after their service fee.

First, I was thinking of taking $1,235 and putting that into savings for cushion. (one months rent)
The remainder I plan to throw all of it towards my car loan. (~$12k remaining) I know it won't cover it all, but at 18.04% it'll eventually save me money and get paid off sooner.

Unless others can suggest what else I do with it, let me know if this is a good idea. (My companies financial advisor suggested I do so.)

marielle

  • Pencil Stache
  • ****
  • Posts: 860
  • Age: 28
  • Location: South Carolina
Re: Took loan against 401(k)
« Reply #1 on: September 01, 2017, 08:30:16 AM »
Sounds like you can't afford a $12k car especially with credit that's as bad as yours. Borrowing against your 401k to pay off your car is just putting a bandaid on the root problem.

$12k is more than what MMM's car is worth and he's a multi-millionaire. So...facepunch.

Laura33

  • Magnum Stache
  • ******
  • Posts: 2908
  • Location: Mid-Atlantic
Re: Took loan against 401(k)
« Reply #2 on: September 01, 2017, 08:38:23 AM »
1.  Sell the car.
2.  Use all of the money to throw at the loan.  You are borrowing money from Future You (and thus foregoing investment earnings on that amount) to put it in a savings account earning nothing, all the while you are paying ridiculous interest rates on the car.  So you're paying twice for the privilege of earning 0.1%.  Bad math.
3.  Do a full case study.  Your fundamental problem is that you are relying on debt to pay down debt.  This is more commonly known as "rearranging the deck chairs on the Titanic."  You need to fix the underlying cause of your overspending, or all of your current efforts will mean nothing.

Raenia

  • Handlebar Stache
  • *****
  • Posts: 1651
Re: Took loan against 401(k)
« Reply #3 on: September 01, 2017, 09:12:02 AM »
Second the recommendation to post a full case study, so we can help you get to the root of the problem.  Most likely we'll be recommending that you need a cheaper car.  If you have to borrow against your retirement to pay for it, you can't afford it.

marielle

  • Pencil Stache
  • ****
  • Posts: 860
  • Age: 28
  • Location: South Carolina
Re: Took loan against 401(k)
« Reply #4 on: September 01, 2017, 09:18:25 AM »
Most likely we'll be recommending that you need a cheaper car.  If you have to borrow against your retirement to pay for it, you can't afford it.

FTFY

Bearblastbeats

  • Guest
Re: Took loan against 401(k)
« Reply #5 on: September 01, 2017, 09:20:41 AM »
Annual Salary: $60,000
Rent: $1,235/m
Student Loans: $120/m
Car Loan: $364/m
Car Ins.: $190/m
Internet: $68/m
Gas: $52/m
Elec.: $55/m
Netflix: $10/m
Pet food & Supplies: `$60-$100
Fuel ~$250/m depends on how much I travel for work
Groceries ~$200/m

slappy

  • Handlebar Stache
  • *****
  • Posts: 1262
Re: Took loan against 401(k)
« Reply #6 on: September 01, 2017, 09:22:05 AM »
Wow, why is your car insurance so high?!? You definitely need to get rid of that car.

Your rent is way too high too. Can you get a roommate or a cheaper place?

slappy

  • Handlebar Stache
  • *****
  • Posts: 1262
Re: Took loan against 401(k)
« Reply #7 on: September 01, 2017, 09:23:20 AM »
What do you mean when you say travel for work? Do you get reimbursed by work for that? If you are traveling that much, maybe you do need a car, but you certainly can not afford the one you have.

marielle

  • Pencil Stache
  • ****
  • Posts: 860
  • Age: 28
  • Location: South Carolina
Re: Took loan against 401(k)
« Reply #8 on: September 01, 2017, 09:26:20 AM »
This only adds up to $2644. Where is the rest of your money going? I make $60k and have $3,800 a month of after tax income (no 401k for me).

Is your w4 withholding correct? If you got a large tax refund of more than a few hundred this year, you should withhold less and get more money each paycheck. Use that to fix your financial situation.

A lot of the categories seem high. If you live alone $55 + $52 on electric and gas is pretty high. Do you drive for work? $250 on gas is crazy. Your groceries could be a bit lower but it depends on your area. How many pets do you have? $100 just for food and supplies is pretty up there. If this includes vet bills then nevermind.

Bearblastbeats

  • Guest
Re: Took loan against 401(k)
« Reply #9 on: September 01, 2017, 09:28:52 AM »
What do you mean when you say travel for work? Do you get reimbursed by work for that? If you are traveling that much, maybe you do need a car, but you certainly can not afford the one you have.

I'm a project manager. I put 40k miles on this car in the last year. My last car (Subaru) had the same payment and was 4 years older. I had a repossession 10 years ago which has screwed me. I need a car for work, its the car I got at the interest rate I could get (which was less than the Subaru).

I get reimbursed $0.54/mile. No, the company DOES NOT supply a vehicle for this.

As far as rent goes, this is the only place I could find to allow me to have my ten year old Labrador within the time frame I had.
No I am not going to give him up, I've raised him his entire life.
I am looking into getting a roommate or getting my GF to move in.

Bearblastbeats

  • Guest
Re: Took loan against 401(k)
« Reply #10 on: September 01, 2017, 09:35:18 AM »
This only adds up to $2644. Where is the rest of your money going? I make $60k and have $3,800 a month of after tax income (no 401k for me).

Is your w4 withholding correct? If you got a large tax refund of more than a few hundred this year, you should withhold less and get more money each paycheck. Use that to fix your financial situation.

A lot of the categories seem high. If you live alone $55 + $52 on electric and gas is pretty high. Do you drive for work? $250 on gas is crazy. Your groceries could be a bit lower but it depends on your area. How many pets do you have? $100 just for food and supplies is pretty up there. If this includes vet bills then nevermind.

I just changed my withholding and my contributions to 401k. My withholding is at 2 (from 1). I owe the IRS $4,500 as it is. My contribution to 401k is now 1% (from 6%)

I don't know why my electric and gas seem high. Everything is on a power strip which I shut off when I leave the house. The gas is for hot water and heat. I have not turned on the heat nor do I have an air conditioner.

I have also quit drinking alcohol, I have not been out to eat at a restaurant for a month (unless my gf has paid). I have canceled every subscription aside from Netflix. My complex has a free gym I use, and I walk my dog daily

I eat chicken and broccoli nearly every night and drink bottled water. I brew my own iced coffee and then drink free coffee at work and bring left overs for lunch.


Laura33

  • Magnum Stache
  • ******
  • Posts: 2908
  • Location: Mid-Atlantic
Re: Took loan against 401(k)
« Reply #11 on: September 01, 2017, 09:36:30 AM »
Does the $60K salary listed include the $0.54/mi. reimbursement?  If not, I am even more confused as to why you needed this loan -- you already have @$1200-1500/mo. extra from your base pay, and if you drove $40K reimbursed miles last year, that's more than $20K more (that is post-tax).  So why are you so short of cash?  Do you track your expenses?  I'm guessing that the numbers you put up are estimates and don't include everything, and the devil is in the omitted details.

Bearblastbeats

  • Guest
Re: Took loan against 401(k)
« Reply #12 on: September 01, 2017, 09:40:43 AM »
Does the $60K salary listed include the $0.54/mi. reimbursement?  If not, I am even more confused as to why you needed this loan -- you already have @$1200-1500/mo. extra from your base pay, and if you drove $40K reimbursed miles last year, that's more than $20K more (that is post-tax).  So why are you so short of cash?  Do you track your expenses?  I'm guessing that the numbers you put up are estimates and don't include everything, and the devil is in the omitted details.

$60k is before taxes. the 40k miles are not ALL reimbursable, I only get reimbursed from office to job site and back. I live in NH, our projects are nationwide with a majority of my travel is to Southern MA, RI, CT, NY.

Yes, I use my mint app and I check it daily.
« Last Edit: September 01, 2017, 09:45:19 AM by Bearblastbeats »

gggggg

  • Bristles
  • ***
  • Posts: 428
Re: Took loan against 401(k)
« Reply #13 on: September 01, 2017, 10:07:25 AM »
It looks like you've recently gotten started on this money journey, good for you. I would open your mint account, and go through your transactions line by line, eliminating every little expense you can. Your rent is high. I would try to get a roommate or look for a cheaper place. You could get something like a beater corolla or civic and ditch the car payment (and the $190 insurance bill? wtf). You may could negotiate your internet down. I went to my internet provider's office IN PERSON, and complained, they cut my bill in half. You may want to do a full case study, in the case study section as well.

slappy

  • Handlebar Stache
  • *****
  • Posts: 1262
Re: Took loan against 401(k)
« Reply #14 on: September 01, 2017, 10:07:40 AM »
If you had a repo 10 years ago, it should be off your credit by now. I don't know what else is on the credit report, but 18% is crazy high.  Can you refi the car? What about the insurance? Why is that so high?

Not that it's a huge expense, but why bottled water?

Maybe you could look into a cheaper apartment now that you aren't so pressed for time? Getting a roommate would be a good option as well. What is the $100 a month in pet expenses? I have a big dog and we budget $70 a month for her. $30 for our Banfield and $40 for food.

slappy

  • Handlebar Stache
  • *****
  • Posts: 1262
Re: Took loan against 401(k)
« Reply #15 on: September 01, 2017, 10:08:39 AM »
It looks like you've recently gotten started on this money journey, good for you. I would open your mint account, and go through your transactions line by line, eliminating every little expense you can. Your rent is high. I would try to get a roommate or look for a cheaper place. You could get something like a beater corolla or civic and ditch the car payment (and the $190 insurance bill? wtf). You may could negotiate your internet down. I went to my internet provider's office IN PERSON, and complained, they cut my bill in half. You may want to do a full case study, in the case study section as well.
$55 for internet right? I live in NH as well and that's what I pay. It's the lowest price available to us.

Edit-I see he pays $68. That's what mine would be if I rented the modem from them. I just bought a modem for $45 to shave off that $10 per month. So we pay $50 a month now.

GenXbiker

  • Bristles
  • ***
  • Posts: 327
Re: Took loan against 401(k)
« Reply #16 on: September 01, 2017, 11:40:09 AM »
I don't know why my electric and gas seem high. Everything is on a power strip which I shut off when I leave the house. The gas is for hot water and heat. I have not turned on the heat nor do I have an air conditioner.

They're not high.   Your electric seems pretty low.  In a single member household, my electric is higher than yours.  For my house, there's about $40 in fees just for having the service before I even turn on the first light switch.

slappy

  • Handlebar Stache
  • *****
  • Posts: 1262
Re: Took loan against 401(k)
« Reply #17 on: September 01, 2017, 11:51:12 AM »
I don't know why my electric and gas seem high. Everything is on a power strip which I shut off when I leave the house. The gas is for hot water and heat. I have not turned on the heat nor do I have an air conditioner.

They're not high.   Your electric seems pretty low.  In a single member household, my electric is higher than yours.  For my house, there's about $40 in fees just for having the service before I even turn on the first light switch.

I agree. Although I do worry that the gas expense will go up as we approach the winter months.

Michael in ABQ

  • Handlebar Stache
  • *****
  • Posts: 1358
    • Military Saints
Re: Took loan against 401(k)
« Reply #18 on: September 01, 2017, 12:10:34 PM »
What do you mean when you say travel for work? Do you get reimbursed by work for that? If you are traveling that much, maybe you do need a car, but you certainly can not afford the one you have.

I'm a project manager. I put 40k miles on this car in the last year. My last car (Subaru) had the same payment and was 4 years older. I had a repossession 10 years ago which has screwed me. I need a car for work, its the car I got at the interest rate I could get (which was less than the Subaru).

I get reimbursed $0.54/mile. No, the company DOES NOT supply a vehicle for this.

As far as rent goes, this is the only place I could find to allow me to have my ten year old Labrador within the time frame I had.
No I am not going to give him up, I've raised him his entire life.
I am looking into getting a roommate or getting my GF to move in.

STOP BORROWING MONEY TO BUY CARS. Especially at 18%.

Craigslist. You should be able to buy a car for cash. Even if it's a $2,000 car you will probably pay for it in mileage reimbursement in a matter of months as $2,000/$0.535 per mile = 3,738 miles. The nice thing about a $2,000 car is even if you put 10-20k miles on it, you can turn around in 6 months and sell it for about what you paid for it. Then you can use that $2,000 plus some other money you've saved up by not having a car payment, and buy a $4,000-5,000 car. Rinse and repeat. If you put 40,000 miles a year on vehicles you are destroying the value, especially if it's a newer vehicle. Based on your payment and interest rate I assume you got a 5-year loan and your vehicle cost about $15k. At the current rate your car will be worth a few thousand dollars in a couple of years and you'll still owe far more than that on it. You're probably already upside down on your current vehicle but getting rid of that will improve your financial situation immensely - even if you have to cut a check for the difference between what you can sell it for and what you owe on it.

I bought a 15-year old small pickup truck off Craigslist for $2,700 about a year ago and I routinely drive it hundreds of miles in a day for work. I just finished a 680 mile day trip last week that I'll get $363.80 in mileage reimbursement for. My gas costs were about $70 and depreciation was probably about $10 as far as getting me closer to the next oil change and/or set of tires. The blue book value is still around $3,000. It leaks a bit of coolant and the paint is in so-so shape and there's a dent on one side, but it was cheap and it gets the job done.

https://nh.craigslist.org/cto/d/2004-toyota-camry-le/6288423397.html $4,100 for a 13-year old Toyota Camry with 87k miles. If you put 40k miles on that you could probably still sell it off in a year for $3,000+ and it's very reliable vehicle that gets around 25 mpg.

Here's another one https://nh.craigslist.org/cto/d/2004-hyundia-sonata-super-low/6289121136.html 2004 Hyundai Sonata with 76k miles for $4,200.
« Last Edit: September 01, 2017, 12:15:23 PM by Michael in ABQ »

Optimiser

  • Pencil Stache
  • ****
  • Posts: 761
  • Age: 38
  • Location: PNW
Re: Took loan against 401(k)
« Reply #19 on: September 01, 2017, 12:27:33 PM »
Does the $60K salary listed include the $0.54/mi. reimbursement?  If not, I am even more confused as to why you needed this loan -- you already have @$1200-1500/mo. extra from your base pay, and if you drove $40K reimbursed miles last year, that's more than $20K more (that is post-tax).  So why are you so short of cash?  Do you track your expenses?  I'm guessing that the numbers you put up are estimates and don't include everything, and the devil is in the omitted details.

$60k is before taxes. the 40k miles are not ALL reimbursable, I only get reimbursed from office to job site and back. I live in NH, our projects are nationwide with a majority of my travel is to Southern MA, RI, CT, NY.

Yes, I use my mint app and I check it daily.

How many of those 40k miles are work miles? You are either getting a lot of money as mileage reimbursements or driving way too much for commuting/personal use. Maybe both.  If half of those miles are for work, you would be getting over $10k/per year tax free which should more than pay for all of your car expenses without ever having to borrow money or even pay out of pocket. That would also mean you are doing 20k miles of non-work driving which IMO is insane.

It seems like there are a lot of expenses you are not listing or based on your income you should have a lot of money left over every month to throw at debt without needing to take a 401k loan.

edit: I'd also consider replacing your current car with a several year old Prius. The gas mileage and low maintenance costs will give you a great arbitrage opportunity with all of those reimbursed miles.

You could drive this one for at least 2 more years: https://nh.craigslist.org/cto/d/2008-toyota-prius/6260378640.html
« Last Edit: September 01, 2017, 12:33:06 PM by Optimiser »

wenchsenior

  • Magnum Stache
  • ******
  • Posts: 2909
Re: Took loan against 401(k)
« Reply #20 on: September 01, 2017, 12:42:23 PM »
So, you posted about your cash flow problem around the same time 2 years ago.  Back then it looks like you had cheaper rent and a car payment that was almost as large.  Everyone told you to get a cheaper car. 

You did not. {ETA: it looks like you bought a slightly cheaper car, but had a larger payment, which amounts to nearly the same thing] Also, it looks like your rent has increased since then by quite a bit.

What is going on?

You are just going to get the same advice now that you got then.  What stopped you from taking it then? What is stopping you from taking it now?

« Last Edit: September 01, 2017, 12:46:22 PM by wenchsenior »

Dave1442397

  • Handlebar Stache
  • *****
  • Posts: 1269
  • Location: NJ
Re: Took loan against 401(k)
« Reply #21 on: September 01, 2017, 01:46:44 PM »
If you do put money towards your car loan, contact the lender first and make sure that your extra money is going towards principal, NOT interest.

1962colreb

  • 5 O'Clock Shadow
  • *
  • Posts: 25
Re: Took loan against 401(k)
« Reply #22 on: September 01, 2017, 04:19:58 PM »
I would first join a credit union and try to refinance the car loan at a lower rate.
If that can be done, I would pay back the 401k loan. Look at your paystub. Where
are your earnings going ? Is your employer provided health insurance high ? Are there
any garnishments ? Don't forget to shop for cheaper car insurance . You might be able
to lower costs there.

Bearblastbeats

  • Guest
Re: Took loan against 401(k)
« Reply #23 on: September 01, 2017, 04:33:02 PM »
I would first join a credit union and try to refinance the car loan at a lower rate.
If that can be done, I would pay back the 401k loan. Look at your paystub. Where
are your earnings going ? Is your employer provided health insurance high ? Are there
any garnishments ? Don't forget to shop for cheaper car insurance . You might be able
to lower costs there.

Yea I have tried all of that. I was denied from service credit union and dcu. I've tried refinancing through 1 or 2 others as well.
I have the cheapest possible insurance from my company, no garnishments.
I shopped cheaper car insurance, I have Geico now and it went up 50 dollars a month when I moved. Progressive was more expensive.

Not much else I can really do other than just bite the bullet.

slappy

  • Handlebar Stache
  • *****
  • Posts: 1262
Re: Took loan against 401(k)
« Reply #24 on: September 01, 2017, 05:08:10 PM »
My guess is the car insurance is high because of a speeding ticket. The Manchester zip code doesn't help. When is your lease up? Maybe you could move to Hooksett or Goffstown? Hooksett has easy highway access. Even Merrimack could work if you need highway access.

What's up with your credit report? Can you ask SCU what your credit score was and for more details on why they denied you? I can give you a name there to contact if you need one.

Bearblastbeats

  • Guest
Re: Took loan against 401(k)
« Reply #25 on: September 01, 2017, 05:56:11 PM »
My guess is the car insurance is high because of a speeding ticket. The Manchester zip code doesn't help. When is your lease up? Maybe you could move to Hooksett or Goffstown? Hooksett has easy highway access. Even Merrimack could work if you need highway access.

What's up with your credit report? Can you ask SCU what your credit score was and for more details on why they denied you? I can give you a name there to contact if you need one.

I live off exit 10, I'm literally across the street from Hooksett with a Manch zip code. And yes, I got a speeding ticket last year. My lease is up in Aug '18, I just moved back here from Nashua. It's been a crazy couple years of moving...

Started in Manchester, lived in one location most of growing up. Left my engineering job and moved to Keene about 4 years ago to attempt college again for a second degree. Spent a month there then moved to Dover to work for my brother installing floors until an architect hired me as his associate/construction manager, spent a year there. Got offered my current job and moved to Concord with a gf (stayed there for a few months), then we moved to Manchester (few months here too), then we moved to Nashua (for about 6 months), then she and I JUST moved back to Manchester at the end of June.


My credit report is chit. I went to that site to get my free credit report and filed through a ton of paper work. It's less than a 600 right now (partly due to a repossession, other things was me being a jackass when I was younger and I broke and in and out of work, and some other personal family stuff happened)

 I guess you could say this is all karma.

slappy

  • Handlebar Stache
  • *****
  • Posts: 1262
Re: Took loan against 401(k)
« Reply #26 on: September 01, 2017, 06:14:08 PM »
Ok, so you need a roommatE ASAP. And you need to do something about the car.  If you get a roommate and put that money toward the car, you can at least get it paid off quicker. Your rent and your car are killing you. Also, you could cut the internet down a bit I think. Mine is currently 59.40 and then when we return the modem we were renting, it will drop 10 a month. So you can buy arisen for $45 and then return Comcast's modem. That will pay for itself in 5 months and then you will be saving $18 a month there.

Are there other expenses not listed here?

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6968
  • Location: BC
Re: Took loan against 401(k)
« Reply #27 on: September 01, 2017, 06:16:36 PM »
I would first join a credit union and try to refinance the car loan at a lower rate.
If that can be done, I would pay back the 401k loan. Look at your paystub. Where
are your earnings going ? Is your employer provided health insurance high ? Are there
any garnishments ? Don't forget to shop for cheaper car insurance . You might be able
to lower costs there.

Yea I have tried all of that. I was denied from service credit union and dcu. I've tried refinancing through 1 or 2 others as well.
I have the cheapest possible insurance from my company, no garnishments.
I shopped cheaper car insurance, I have Geico now and it went up 50 dollars a month when I moved. Progressive was more expensive.

Not much else I can really do other than just bite the bullet.

NEW IDEA

Figure out how much per year your company is paying you for the mileage, then show them that if they leased a company car, for your use, it may be cheaper.  Look into leasing a modest and boring vehicle.   

What I am thinking is that they would have lower cost lease and insurance rates, so even if you have to reimburse your work or the tax man quite a sum for your personal use of the vehicle, you could still save a lot of money, and so would they.    If you don't have an office, but leave from home to the worksite,you can park the car at home AND you can then pick up a bike or scooter / motorcycle for your personal use for most of the time.

This is to buy you more time to get your credit score back up so you can own your own car in a couple more years.

Worth a look. 

BigMoneyJim

  • Bristles
  • ***
  • Posts: 299
  • Age: 51
  • Location: Nomadic retiree in the Rockies
    • Jim's Personal Finance Blog
Re: Took loan against 401(k)
« Reply #28 on: September 02, 2017, 09:32:06 PM »
after their service fee.

[...]

(My companies financial advisor suggested I do so.)

Red flags being raised here for me. Service fee for borrowing money from yourself? F that! I don't recall a fee when I borrowed ages ago, and the interest I paid was paid to my account.

Add to that your company's financial adviser, and I'm smelling some BS going on here. I'm doubting this adviser has your best interests in mind over his/her fees or portion of the fee.

I borrowed half my 401k back in the early 90s and missed out on a lot of growth in a huge bull market. 0/10 would not recommend.

Sounds like you can't afford a $12k car

OP said $12k remaining, so I'm guessing this car cost a lot more originally.

So yeah, I'm thinking quit going to your company's advisers, and the car seems like the biggest opportunity to get costs under control.

At 18% I'm wondering if you can get a signature loan on a cheap(er) car and get by with liability only. Only if you can't swing buying a car cash.

In the age of Uber and Lyft, can they serve as a backup plan if you buy a cheap car that breaks down?

Alternately, is it possible to get a different job that relies less on your car? Because of taxes, it's always more effective to cut costs than to earn more, and your car plus insurance is sinking you.

Also, would having your GF move in with you decrease or increase your costs? Are you sure?

Bateaux

  • Handlebar Stache
  • *****
  • Posts: 1936
  • Location: Port Vincent
Re: Took loan against 401(k)
« Reply #29 on: September 03, 2017, 09:08:48 AM »
I'm going to go against the grain and say to keep the car.  Getting rid of it and replacement with a cheaper one won't help much.  You've already made the mistake.  It's too late to worry about the 401k loan as well, it's done, the fees have already posted.  The only good I can see is that the market is at a highpoint.  You may still lose gains, but at least it isn't tanked.  NOW!  On to fixing the problem, that's you.

Get a roommate quickly to pay half the rent and utilities.   Do that immediately.
Take that savings and every dime spare and kill that car loan.
Then, pay off the student loans.  Hopefully they aren't huge and at disastrous interest rates.
No more credit.  None.  That's what got you here.
Get the 401k paid back and fund it at least to get the company match, even now if possible get the company match.
Did I mention no more credit?  None!  Credit is a tool for the skilled and enslavement for the unskilled.  Maybe someday you'll get to use good credit for a home purchase after saving a large downpayment.  Until then, NONE!!
« Last Edit: September 03, 2017, 09:11:18 AM by Bateaux »

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5226
Re: Took loan against 401(k)
« Reply #30 on: September 03, 2017, 09:26:44 AM »
I'm sorry to hear this.  You were doing really well for awhile. 

Best to cut all the lifestyle stuff, pay off these loans, and get back in control.  Too much stress with your health issues.  In your shoes, I would stop answering phone calls from your brother, who is trying to solve his problems, not help you. 

Your employer needs to step up with mileage reimbursement or provide a car.  Your employment history is a little uneven, so I wouldn't quit over the issue, but I would consider looking for a better job as time goes on.

All these problems can be solved with some patience and self discipline.  And a little time.  Start making changes now and they will pay off.

BigMoneyJim

  • Bristles
  • ***
  • Posts: 299
  • Age: 51
  • Location: Nomadic retiree in the Rockies
    • Jim's Personal Finance Blog
Re: Took loan against 401(k)
« Reply #31 on: September 03, 2017, 09:34:00 AM »
I'm going to go against the grain and say to keep the car.  Getting rid of it and replacement with a cheaper one won't help much.  You've already made the mistake.

Fair point. It's situational on whether or not changing this will help enough to make it worth the trouble, and he'll have to figure it out for himself. (Assuming gender here.)

In 2001/2002 I was able to sell my truck for what was owed on it and buy a car from family and paid it out to them. So both my payments and total cost went down, and so did my insurance as I went liability-only. But not everyone has that opportunity, and in the case of mustachians not everyone can get a $500 Buick and make do.

Huh, come to think of it, I've driven both my late grandmothers' last cars for several years each. One gave it to me after she couldn't drive anymore and a mechanic tried to scam her out of it—told her it was not worth fixing, but I put transmission fluid and a new battery in and drove it for years—and the other I bought from my granddad after she passed, and it was to him I paid it out. I'm a car vulture, apparently.

Quote
It's too late to worry about the 401k loan as well, it's done, the fees have already posted.  The only good I can see is that the market is at a highpoint.  You may still lose gains, but at least it isn't tanked.  NOW!  On to fixing the problem, that's you

This is probably true about the 401k, and certainly about the high point. I eschew market timing, but it's hard to imagine us as poised for a huge bull run-up right now. I was mainly pooh-poohing the loan for others, but OP probably has to lie in this bed he made with respect to the 401k.

So yeah, OP, don't necessarily undo things, but get creative in cutting costs going forward.

Erica

  • Bristles
  • ***
  • Posts: 472
  • Married
Re: Took loan against 401(k)
« Reply #32 on: September 03, 2017, 11:18:59 AM »
Even though you are renting, it might be an easy couple hundred dollars a month if you have a spot near your house to allow someone to live in a motorhome. We charged $175 and he stayed on the side of the house. I liked it, especially due to the increase in crime at the time. We found him on Craigslist. Had to go thru interviewing about 6 people prior. Gotta be real picky. He was an ex contractor.


If you allow utilities, that might be touchy as you'd need to charge for it. An acquaintance friend rents in a very cheap RV park for $375. He told me what is expensive is the summertime when the AC is on. Not the winter as he uses a gas or karo-sine heater.


Bearblastbeats

  • Guest
Re: Took loan against 401(k)
« Reply #33 on: September 04, 2017, 07:40:45 AM »
To clear any confusion.

The service fee was from Mass Mutual to process the loan. The 5.25% interest go back into my retirement fund, essentially I'm paying myself back.

My logic was that the 5.25% loan to myself is better than 18 to a bank.

I can't sell the car because I don't have the fund to pay the balance, I'll need another car anyway to get to work, bring my dogs places, and haul my drums and other gear. So I'm keeping the car.

I live in a complex so definitely not going to have anyone live in an RV. Looking at getting a temporary roommate. Not certain I want to as this is the first time in ten years I've ever lived alone and I'm reeeeeallly enjoying that.

My gf will probably move in when she gets her license back, but I think my plan with the loan will atleast give me some breathing room.

slappy

  • Handlebar Stache
  • *****
  • Posts: 1262
Re: Took loan against 401(k)
« Reply #34 on: September 04, 2017, 07:47:22 AM »
To clear any confusion.

The service fee was from Mass Mutual to process the loan. The 5.25% interest go back into my retirement fund, essentially I'm paying myself back.

My logic was that the 5.25% loan to myself is better than 18 to a bank.

I can't sell the car because I don't have the fund to pay the balance, I'll need another car anyway to get to work, bring my dogs places, and haul my drums and other gear. So I'm keeping the car.

I live in a complex so definitely not going to have anyone live in an RV. Looking at getting a temporary roommate. Not certain I want to as this is the first time in ten years I've ever lived alone and I'm reeeeeallly enjoying that.

My gf will probably move in when she gets her license back, but I think my plan with the loan will atleast give me some breathing room.

I think I need to swing by on my way to Target and face punch you! :) you can't afford to live alone. Trust me, I know it's way better than having a roommate. You need to get a roommate for at least a year and get thatvcar paid off. That will save you so much money. Even then, you will need to start saving for another car, since you drive a lot and seem to go through them quickly. The only other option is to increase your income. I know the area and the chances of finding a less expensive place that will take the dog are slim.

PDXTabs

  • Magnum Stache
  • ******
  • Posts: 2553
  • Age: 38
  • Location: Portland, OR, USA
Re: Took loan against 401(k)
« Reply #35 on: September 04, 2017, 09:32:32 AM »
I actually don't think that 401(k) loans are as bad a deal as people make them out to be. Think of it as a bond in your portfolio.

With that said, it sounds like your credit is horrible. I would use some or all of the 401(k) loan money to pay off as much high interest debt as you can (highest interest first). Also, I wouldn't "worry" about the car loan, but I would do my best to never get into that situation again. More specifically, I would watch your credit very carefully to make sure that it is only getting better. Than nothing else bad shows up, ever. Other than bankruptcy, everything bad will fall off after 7.5 years.

EDIT - As your credit improves you will have better access to car insurance, and once your loan is paid off you can drop collision. I would shop around once a year if I was paying what you are paying.

EDIT2 - It sound like you have to drive for work. That would be a lot easier with good credit, which you too can have one day.
« Last Edit: September 04, 2017, 09:35:30 AM by PDXTabs »

Lulee

  • Bristles
  • ***
  • Posts: 252
  • Location: NH
  • "We'll jump off that bridge when we come to it."
Re: Took loan against 401(k)
« Reply #36 on: September 04, 2017, 11:54:10 AM »
If you don't have to go into the office daily (I'm making an assumption that it's in Manchester which is why you moved back there), would it be more cost-effective to move to a border town like Hinsdale which would cut down on commute time to various southern New England job sites?  Hinsdale gets you close to I-91.  If you prefer to be more in the center of the state, I seem to recall Greenville having some lower cost apartments when I checked a few years ago --- but the gas pipe line may go through there if it gets built along with Winchester, Rindge, and a handful of other borderline towns.

ExitViaTheCashRamp

  • Stubble
  • **
  • Posts: 204
Re: Took loan against 401(k)
« Reply #37 on: September 04, 2017, 12:12:42 PM »
Car Ins.: $190/m

 Holy Rip-off Batman !!! Is this anything like normal over in the US ? Here in the UK, my '08 Renault Scenic costs me £330 a YEAR !

Michael in ABQ

  • Handlebar Stache
  • *****
  • Posts: 1358
    • Military Saints
Re: Took loan against 401(k)
« Reply #38 on: September 04, 2017, 12:41:37 PM »
To clear any confusion.

The service fee was from Mass Mutual to process the loan. The 5.25% interest go back into my retirement fund, essentially I'm paying myself back.

My logic was that the 5.25% loan to myself is better than 18 to a bank.

I can't sell the car because I don't have the fund to pay the balance, I'll need another car anyway to get to work, bring my dogs places, and haul my drums and other gear. So I'm keeping the car.

I live in a complex so definitely not going to have anyone live in an RV. Looking at getting a temporary roommate. Not certain I want to as this is the first time in ten years I've ever lived alone and I'm reeeeeallly enjoying that.

My gf will probably move in when she gets her license back, but I think my plan with the loan will atleast give me some breathing room.

What is the value of the car (Kelly Blue Book, NADA, Edumunds, etc.) vs. what you owe on it? The difference shouldn't be more than a few thousand dollars unless you rolled over a bunch of negative equity from an earlier loan.  Let's say you could sell it on Craigslist for $9,000 and you still owe $12,000. You therefore need $3,000 in cash to add to the $9,000 from selling it to pay off the loan. You also need a couple of thousand to buy a cheap car until you can save up for something better. Normally I would recommend going to a credit union to get a small unsecured loan for the difference but since you've already got your 401k loan, you might as well use that. Sell the car on Craigslist (or wherever), sign a bill of sale with the buyer and get the cash. Send that cash, plus the difference from your 401k loan to your lender. They will then release the title which you will provide to the buyer. This is a bit of a hassle but will get you out from under a crushing debt.

Here's what that will do. It will immediately remove your car payment freeing up $364 per month. In addition, you can drop collision coverage and probably get your insurance down to below $100 per month, thus freeing up even more cash. Let's say the savings from those two things adds up to $450 per month. If you bought a $2,500 car and could save an additional $450 per month in about six months you could save up enough to upgrade to about a $5,000 car.

Optimiser

  • Pencil Stache
  • ****
  • Posts: 761
  • Age: 38
  • Location: PNW
Re: Took loan against 401(k)
« Reply #39 on: September 04, 2017, 12:51:51 PM »
Car Ins.: $190/m

 Holy Rip-off Batman !!! Is this anything like normal over in the US ? Here in the UK, my '08 Renault Scenic costs me £330 a YEAR !

I'd say no. I pay 600/year for 2 cars. But OP has poor credit and lives in a more metropolitan area which both cause higher rates.

aceyou

  • Handlebar Stache
  • *****
  • Posts: 1612
  • Age: 38
    • Life is Good - Aceyou's Journal
Re: Took loan against 401(k)
« Reply #40 on: September 04, 2017, 02:51:03 PM »
Car Ins.: $190/m

 Holy Rip-off Batman !!! Is this anything like normal over in the US ? Here in the UK, my '08 Renault Scenic costs me £330 a YEAR !

In the US, most do the following sequence, and pay extra every step of the way:
1.  Select a vehicle that costs way more than they have have.
2.  Get a loan to make up the difference, thus they not only are paying for a car they can't afford, but the interest on the loan.
3.  The bank that gives the loan forces you to get very expensive full coverage insurance on the car, because the car is collateral in case you default, so the bank makes you pay to protect it. 

So, the OP is overpaying for three things...1) the car, 2) the interest on the loan, and 3) the insurance. 

All self-inflicted, and it's a main reason americans stay poor.   

Most Americans on THIS website, do the following:
1.  Buy a cheap car with money they already have.
2.  Pay zero interest because they didn't take out a loan.
3.  Get PLPD insurance for $350/year because if their 2k car dies, they'll just buy another 2k car. 

OP, this is one of the main reasons most MMMer's are getting rich quickly.  Our vehicle costs are literally a quarter of the typical american. 

OP, you don't have to beat yourself up about the car any longer.  You didn't know, and you fell for the trap that most americans fall for.  But it's not ok to ever do this again.  Pay it off NOW, throw everything at it, and make sure your next car purchase is an MMM approved vehicle:) 

And as a math teacher, I agree with other posters that the numbers don't add up.  Money is leaking to other places in large numbers that haven't found their way into your spreadsheets.  Figure out what's causing this and start reaping the rewards of at least another 1k/month. 

Good luck!

Michael in ABQ

  • Handlebar Stache
  • *****
  • Posts: 1358
    • Military Saints
Re: Took loan against 401(k)
« Reply #41 on: September 04, 2017, 03:16:24 PM »
Car Ins.: $190/m

 Holy Rip-off Batman !!! Is this anything like normal over in the US ? Here in the UK, my '08 Renault Scenic costs me £330 a YEAR !

$38/month ($456/year) for my 2000 pickup truck and $68/month ($816/year) for my wife's 2009 minivan with full coverage which adds about $30/month. That's living in a city with the highest auto theft rate in the country. Right on the bubble about dropping the full coverage but $360/year to potentially replace a $6,000-7,000 vehicle is still a reasonable trade off as that would otherwise deplete a good chunk of our emergency fund.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 2482
  • Location: Seattle, WA
Re: Took loan against 401(k)
« Reply #42 on: September 04, 2017, 03:55:53 PM »
I actually don't think that 401(k) loans are as bad a deal as people make them out to be. Think of it as a bond in your portfolio.

A bond that doesn't pay you anything.  Yes, you get to keep the interest on the money, but the interest is coming out of your pocket in the first place.    And in the OP's case there was an admin fee.   For example, the OP borrowed about $5K.  If the fee was $100, he just lost 2%.   

One problem that a lot of people don't think about is that you have to repay the loan with after tax money--which is then taxed again when you withdraw the money in retirement. 

A 401(k) loan might make sense in the OP's case, but they generally aren't a good idea. 

Edit:  One other thing I was going to mention.  You are planning on just keeping a portion of the 401(K) loan in cash as sort of an emergency fund.  Terrible idea.  You have an 18% car loan.  Kill that thing.  Remember, you still have to pay back the 401(K) and the interest.  That lowers the amount of monthly cash you have to attack that horrible 18% car loan. 

If you need an emergency loan for a month's rent, then tap the 401(k) again.  Or better yet,  actually save up the cash yourself. 

« Last Edit: September 04, 2017, 06:08:03 PM by Telecaster »

Dicey

  • Senior Mustachian
  • ********
  • Posts: 15248
  • Age: 63
  • Location: NorCal
Re: Took loan against 401(k)
« Reply #43 on: September 04, 2017, 04:56:25 PM »
I actually don't think that 401(k) loans are as bad a deal as people make them out to be. Think of it as a bond in your portfolio.

A bond that doesn't pay you anything.  Yes, you get to keep the interest on the money, but the interest is coming out of your pocket in the first place.    And in the OP's case there was an admin fee.   Depending the size of the loan/fee, that easily add 1% to the cost. 

One problem that a lot of people don't think about is that you have to repay the loan with after tax money--which is then taxed again when you withdraw the money in retirement. 

A 401(k) loan might make sense in the OP's case, but they generally aren't a good idea.
Another problem is that you typically have to pay it back very quickly if you separate from your company. Did you find out what your repayment window is, should you choose to leave, OP?

PDXTabs

  • Magnum Stache
  • ******
  • Posts: 2553
  • Age: 38
  • Location: Portland, OR, USA
Re: Took loan against 401(k)
« Reply #44 on: September 04, 2017, 05:13:50 PM »
A bond that doesn't pay you anything.  Yes, you get to keep the interest on the money, but the interest is coming out of your pocket in the first place.    And in the OP's case there was an admin fee.   Depending the size of the loan/fee, that easily add 1% to the cost.

Your 401k can't tell the difference. All it knows is that it has a (essentially) bond that pays 5.25%. I don't know about the OPs origination fee. I believe that my company has a flat $50 fee.

Outside the 401k, sure, you are paying yourself interest. But I'd rather pay myself 5.25% than pay a bank 18.04%.

One problem that a lot of people don't think about is that you have to repay the loan with after tax money--which is then taxed again when you withdraw the money in retirement. 

You have to pay the 401k loan back with after tax money just like every other loan.

Dicey is correct that the biggest risk is that you can't pay it back. Also, the 401k may demand immediate repayment if you leave the company for any reason.

Bateaux

  • Handlebar Stache
  • *****
  • Posts: 1936
  • Location: Port Vincent
Re: Took loan against 401(k)
« Reply #45 on: September 04, 2017, 05:55:55 PM »
The immediate payback clause mentioned by Dicey, if separated from employment is the biggest danger.  I got a 401k loan back in the 90s for $10,000 for home remodeling.  I kept putting away 15% of my salary and maxed my contribution at the same time.   It worked out fine for me, but a credit union loan would have worked as well.  Interest rates were higher then and that probably made me do the 401k loan.  The 401k is now nearing a million so I guess all is well.   

MrsPete

  • Magnum Stache
  • ******
  • Posts: 3513
Re: Took loan against 401(k)
« Reply #46 on: September 04, 2017, 05:59:45 PM »
Good day.

I took a loan against my 401(k) to help with my current financial situations. I should be getting back ~$5,600 after their service fee.

First, I was thinking of taking $1,235 and putting that into savings for cushion. (one months rent)
The remainder I plan to throw all of it towards my car loan. (~$12k remaining) I know it won't cover it all, but at 18.04% it'll eventually save me money and get paid off sooner.

Unless others can suggest what else I do with it, let me know if this is a good idea. (My companies financial advisor suggested I do so.)
Wait, you took out a loan against a 401K ... a choice that most financially savvy people consider a big financial mistake ... and you did it without a solid plan for what to do with that money?  without knowing -- to the penny --  how much you'll receive? 

Your company's financial advisor is not giving you good advice.  Did he really suggest this plan of action, or did he just tell you how to go about taking out the loan?  Regardless, ignore him.  Sell the car and get something cheaper.  Move into a cheaper place. 

Annual Salary: $60,000
Let's put this into perspective:  I am currently supporting my family of three (including paying college tuition and support of three cars) on less money than you're earning.  AND I'm putting money into savings every month. 

I'm a project manager. I put 40k miles on this car in the last year. My last car (Subaru) had the same payment and was 4 years older. I had a repossession 10 years ago which has screwed me. I need a car for work, its the car I got at the interest rate I could get (which was less than the Subaru).
Okay, I accept that you need a car; however, you need a car that you can actually afford.  If you insist upon keeping this car with its high price tag, you must slash expenses in some other area. 

As far as rent goes, this is the only place I could find to allow me to have my ten year old Labrador within the time frame I had.
No I am not going to give him up, I've raised him his entire life.
I am looking into getting a roommate or getting my GF to move in.
So failure to plan got you into this situation, and now you're now in a rental you can't really afford.  You're in it now ... but when does your lease expire?  Are you looking for something cheaper once the lease expires? 

Your rent and your car are killing you.
Yes, the problem is that you're topped-out on those two big expenses AND are spending pretty heavily on some others.  In the whole wide world, only two options exist to get yourself out of this: 

1.  Reduce expenses
2.  Earn more money

Seriously, no other options exist.  What you're trying to do is borrow your way out of debt, and that can never, never, never work. 

Even though you are renting, it might be an easy couple hundred dollars a month if you have a spot near your house to allow someone to live in a motorhome.
How about you start looking for a motorhome for yourself to live in after your lease expires?  You can get used motorhomes for practically nothing, and you wouldn't have to ask anyone's permission to have your dog in it.  RVs are pretty expensive to drive around, but they're cheap to park and use as a primary residence.

I actually don't think that 401(k) loans are as bad a deal as people make them out to be. Think of it as a bond in your portfolio.
Hmmm, when math-oriented people agree almost universally on a financial topic, it's probably because they're right ... and, yeah, people who are good at finances will tell you: Do not borrow from your 401K.  In the OP's case, done is done, but I have to disagree strongly with the idea that -- except in a huge, huge, financial crisis -- borrowing against a 401K should ever be a choice. 

You have to pay the 401k loan back with after tax money just like every other loan.

Dicey is correct that the biggest risk is that you can't pay it back. Also, the 401k may demand immediate repayment if you leave the company for any reason.
Another problem with 401K loans -- one that isn't mentioned much -- is that the amount you put away in the 401K didn't count as income in the year you earned it; so as far as the IRS is concerned, it's income in the year 2017.  Meaning the OP is going to be taxed on 60K earnings + the 401K amount next April. 

And, yes, the possibility of separating from the company /being forced to pay it back immediately is a scary proposition. 
« Last Edit: September 04, 2017, 06:12:10 PM by MrsPete »

Bearblastbeats

  • Guest
Re: Took loan against 401(k)
« Reply #47 on: September 04, 2017, 06:26:23 PM »
Not worried about leaving my company. Loan is for 5 years and I'll probably be at this company for close to the rest of my career. They pay the most for what I do, at my education level.

I couldn't plan to find a better rental because my last landlord gave me a month's notice to move when his daughter showed up out of the blue and wanted to rent the house he was renting out to me.

MrsPete

  • Magnum Stache
  • ******
  • Posts: 3513
Re: Took loan against 401(k)
« Reply #48 on: September 04, 2017, 07:13:23 PM »
Not worried about leaving my company. Loan is for 5 years and I'll probably be at this company for close to the rest of my career. They pay the most for what I do, at my education level.
Another way to say that:  I like my company and do not plan to leave; however, if they were to let me go (which could happen to anyone, anywhere), I could not make this much money at another place.  That exacerbates all of the above comments. 

I couldn't plan to find a better rental because my last landlord gave me a month's notice to move when his daughter showed up out of the blue and wanted to rent the house he was renting out to me.
Okay, so you were pushed out of your old place, but what about the rest of it?  When does your current lease end, and are you using the time available to you now to find a better option for when that day comes? 

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 2482
  • Location: Seattle, WA
Re: Took loan against 401(k)
« Reply #49 on: September 04, 2017, 07:16:02 PM »
A bond that doesn't pay you anything.  Yes, you get to keep the interest on the money, but the interest is coming out of your pocket in the first place.    And in the OP's case there was an admin fee.   Depending the size of the loan/fee, that easily add 1% to the cost.

Your 401k can't tell the difference. All it knows is that it has a (essentially) bond that pays 5.25%. I don't know about the OPs origination fee. I believe that my company has a flat $50 fee.

You're right.  Your 401(k) can't tell.  If you are trying to deceive your 401(k) that's a fine strategy. But your pay stub can tell, because if you were buying a bond in your 401(k) it would be with pre-tax dollars.  Instead you are buying the "bond" with post tax dollars.  Big, big difference.    And your net worth can tell too.   And it knows it isn't increasing.  Even if you want to think of it like a bond, it still isn't at all like having a bond in your 401(k). 

I guess the question is if you are more worried about your 401(k) knows or your net worth knows?   I know which one I'm more worried about. 

Now, I agree that in some circumstances a 401(k) loan might be the best thing to do.  And the OP might be one of those cases.  Sometimes you have to chew off a leg to get out of the trap.  But he is lying to himself if he looks at it like having a bond in his 401(k).  It is completely unlike a bond.  Bonds are assets.  The loan is a liability that he is responsible for.   And as you point out, the full amount of this liability is callable in some circumstances.  One of which is losing your job, another of which is failure to make the loan payments.   Since the OP is already having trouble making payments...I'm guessing more loan payments won't help much. 

The OP borrowed $5000-ish.  So with a $50 origination fee, that's a 1% loss off the top.  If you are desperate and that's your only option, then that's what you have do.  But that's an expensive way to borrow money. 

So go ahead and think of a 401(k) loan like a bond.  Only not like a bond in your 401(k) because you get no tax advantage.  And if the "counter party" defaults, the IRS can seize the full value of the bond out of your bank account.  In exchange for taking that risk,  the bond doesn't actually pay you anything. You get exactly zero return on investment. Might possibly be the shittiest bond that was ever floated in the history of bonds.