Question

Hi friends!  I have a question for all of you.Hi friends! I have a question for all of you. My husband and I have $6000 from our tax return to put toward a debt payment this month, but I’m trying to decide which one. *Credit card with $12000+ balance and about 15% interest (minimum $315) OR *Personal Loan against our 401K with $8000+ balance and 28% interest (minimum $486 that gets paid automatically pre-tax) We were initially going to chop that credit card in half, but we’d be so much closer to getting that 401K loan done and it’s a higher interest rate. On the other hand, we’re paying ourself back and it would be great to knock out that extra creditor sooner. What are your thoughts? Thank you!  

Answer 1

Would your minimum lower if you paid the 401K loan? I’m all about freeing up the extra money a month.  

Comments

@tribasic62731 I’m honestly not sure, but it’s definitely worth looking into.  

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@recalesce67845 yeah I love the though of pushing yourself back you know? But I also like when more money is freed up. If paying off a big chunk like that wouldn’t lower payments I’d do the cc option.  

Answer 2

401k should something happen and you lose that job it would be due immediately or you're take a tax hit

Answer 3

I would do the 401k. Job loss or any other even that could end the working relationship could cause tax issues for you.  

Answer 4

Unless his job is 100% secure I’d pay off the 401K loan. Speaking from experience, you probably want to avoid the tax consequences of that loan being considered a distribution.  

Answer 5

401K! Pay yourself back first  

Answer 6

I would do the 401k for sure.  

Answer 7

401k for sure!  

Answer 8

Most 401k loans are paid back post tax. You already got the pre-tax benefits when you originally contributed. You don’t get it twice.  

Answer 9

The personal loan, for sure. The snowball method would dictate paying that one, the avalanche method would dictate paying that one, and financial security in the long-term would dictate paying that one. So it's definitely the winner.  

Answer 10

I'd do the 401k loan since the interest is higher.  

Answer 11

401k. Interest loan is way higher

Answer 12

Definitely the 401k. Think how much quicker you could pay off that credit card freeing up that $500/month you’re paying that.  

Answer 13

Personal loan

Answer 14

Is the 28% interest on the 401k loan going to you though? If you are paying yourself the interest, then I don’t hate the 28% & I’d pay the credit card. If you are paying an outside company & the 401k is just collateral for then loan, then pay that one for sure.  

Comments

@sitology77 My husband just told me that we are paying ourselves back with the interest.  

Answer 15

I don’t understand why the 401 interest rate is 28percent?  

Answer 16

Will your 401k loan allow additional principal payments? I’ve heard that many only allow a full payoff, in which case you would need to continue saving to reach the payoff amount, and at that point the credit card makes more sense because it immediately lowers your out of pocket.  

Comments

@meningitis I honestly don’t know, but I had thought about that too. My husband seems to agree that it makes more sense to free up some of the credit card debt.  

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I think both are very good options, I would just recommend investigating if an additional principal-only payment is possible on the 401k loan before you decide. The others have a point too though that at least that crazy interest rate on the 401k loan is going to yourself as opposed to the cc interest going to the cc company.  

Answer 17

401k loan. If you lose your job for any reason it becomes due in full!  

Answer 18

Yes your 401k loan

Answer 19

Personal loan

Answer 20

Highest interest.  

Answer 21

Thanks, everyone! I’m honestly not sure about the 28% interest and whether or not it’s paid back to us. We took it out a couple of years ago when we were paying for our wedding and found a huge mold problem in the house that needed immediate remediation. The payments may not be pre-tax as I stated. They come right out of my husband’s paycheck automatically, so I’m not clear on the details. His job is pretty secure, but I completely understand the thought behind paying that off first. He’s just concerned that if something major were to happen in the near future that we would be better having the room on the credit card since we can’t take out against the 401k again. Ideally, we won’t have to use credit for anything, but we’re still building our EF, so he feels more secure having that backup.  

Comments

@recalesce67845 if you borrowed the Money directly from his 401k & the loan payback us coming out of his paycheck, I’d be shocked if the interest rate is 28%. And the payments are not pre-tax, they come out if his check but would not be pre-tax. I have taken many 401k loans - I’ve NEVER seen one with interest that high but even if that’s accurate, all the interest goes back into the 401k. Yes, if he leaves his job, the total amount would be due or you will owe taxes plus penalty, but if the balance is only $8k, the tax bill shouldn’t be terrible. The benefit to paying the credit card are a few - he’s correct that it frees up that for an emergency. In addition, the 401k loan does not report in your credit. By paying down the credit card, your credit report will reflect it & should help improve your credit. If he logs into his 401k, you should be able to see the loan info - how much the interest is & all that. My one 401k loan is 4%, the highest I ever had was at 6. 5%. I still personally would pay the credit card first & then pay off the 401k loan after. You may not be able to make additional payments on that like you would a credit card. With mine, I have to send a cashier’s check in by traceable mail (I have fed ex’d it in the past) if I want to make extra payments.  

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@sitology77 Thank you! This information is helpful. I’m not sure where he got the 28% from, but I’m sure that you’re right.  

Answer 22

Honestly, I would tackle that 401k loan. As I found out the hard way, if you leave that job before the loan is paid back they will stick it to you. I lost almost 10k out of my 401k because I had a loan and left the employer before I paid the loan back.  

Answer 23

Personal loan. Then the extra money can go towards that credit card.  

Answer 24

As much as it would feel good to pay down the CC I think the right move is the 401k loan. As other people have said if you leave the job for any reason it becomes due in full immediately. You may not be able to pay extra toward it so I would double check. If you can’t I would put that money in savings and then add to it until you have the full amount. Then you’ll be able to throw a minimum of $800 to the CC and knock it out quickly.  

Answer 25

Personal loan. You will save on interest and you can use that extra money to pay down the credit card.  

Comments

@wade8826 this  

Answer 26

I guess I’m the oddball. I’d pay the credit card. The interest on the 401k loan is most likely to yourself. You also know how secure your job is. If your looking to move companies then I’d work on the 401k first.  

Comments

@salep58148 the interest you pay goes to the bank that holds your 401K funds, not back into your 401K.  

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The interest does not go to the bank.  

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@wade8826 My husband says that it’s going back to the 401K. I didn’t realize that when I originally posted.  

Answer 27

401k hands down.  

Answer 28

Personal loan

Answer 29

Personal loan