Americans are starting to take advantage of an usual lender.
The loans are in companies that allow employees to borrow against their 401 (k) plans. In fact, there was a double digit increase from 2009 to 2010, with about one in seven workers borrowing against their own savings.
But is this a smart move? Critics say there are pluses and minuses to doing this. You pay yourself back while repaying the loan, but you lose the interest your money earns while you're repaying it.
Your 401 (k) is designed to allow you to set aside money for retirement. But some financial experts fear it's a piggy bank that can be tapped into much too easily. As the recession hit, many out of work Americans turned to their retirement savings plan to fill in the gap and repay outstanding loans.
"While it sounds like a quick and easy way to access immediate cash, there are many pitfalls besides the obvious that you are reducing your future retirement income," said Cynthia Scott, President of OMC Financial Services in DeWitt. "One of the negatives is that you are repaying your loan with after tax dollars."
Currently, there is new legislation being considered that would regulate loans from 401 (k) plans. The Savings Act would extend the time to pay back a 401 (k) loan among people who have lost their job. It would also reduce the number of loans to three that the person can take at one time.
Right now, if you take a hardship withdrawal out of a 401 (k), you can't make contributions to your plan for 6 months. Employer matching contributions are also forbidden. But under the new legislation, you would be able to continue contributing to your 401 (k) plan after they've made a that withdrawal.
If approved, the bill would also ban the use of 401 (k) debit cars. Although they aren't widely used and mainly offered online, their use taps into savings set aside for retirement.
Many still consider borrowing from their 401 (k) taboo, perhaps a last resort. But a growing number of people are turning to them in light of their personal financial woes.
Here's what some people are saying about this online:
"Having run a large 401(k) plan for nearly thirty years I can tell you no matter whose money it is, the average person has no idea what he is doing with it and certainly they don't view it as key to their retirement. borrowing is foolish unless there is no alternative."
"The money in my 401K is mine to use as I see fit...even if I do something foolish with it, its my choice because its my money."
"While it is important not to abuse this feature, the 401k loan option, in my personal opinion, is a much better way to balance your portfolio as opposed to bonds or money market funds."
Do you have a 401 (k)? Have you ever borrowed from it? Do you think it's risky? Leave your thoughts below.
