Many people get loans for different reasons. They either want to buy a house or a car, or they need to consolidate debt. Banks are usually the best and only source for most individuals who need the extra money. Anyone who has bought a house has had to deal with a bank to acquire such a mortgage loan.
Borrowing money from a 401(k) should always be the last resort. This means that if it's possible to get a loan from some other source (i.e. bank), then that is usually the best course of action. After all, money is put aside in a retirement account so that money will be there when the individual retires.
Disadvantages of a 401(k) Backed Loan
Why should a 401(k) be the last source for loans? One of the main reasons is that there is a maximum amount of time the loan must be paid back, unless it is to buy a main home. So no matter how much is borrowed, the investor has a maximum of five years to pay it back. This repayment must also be deducted from the person's paychecks for the remainder of the loan.
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