Articles Tagged with loan

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AdobeStock_16747416-300x221Many employers provide 401k plans for their employees.  A 401k plan is a retirement savings plan where employees can save a portion of their pre-tax earnings. Taxes aren’t paid on the money until it is withdrawn from the account.

Some, but not all, 401k plans permit employees to take out a loan against the 401k. Just because you can, doesn’t mean you should.  Here are the main things to consider before you take a loan against your 401k account.

Loans against 401k accounts come with all of the same formality as any other type of loan. There will be a loan agreement that sets forth the terms of the loan, the interest rate, and any fees associated with the transaction. Just because you are borrowing your own money, don’t assume you will get a great deal on the interest rate. The interest rate you will be charged will be comparable to the rate a conventional lender would charge for a similar-sized personal loan.  If you have poor credit, however, you may get a better interest rate than you would at a bank.

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If you have a brokerage account, you have probably received a pitch from your broker for a securities-backed line of credit (SBLOC).  Contrary to the flashy marketing brochure you may have seen, SBLOCs aren’t the best things since sliced bread.  Know the facts before you consider one.

An SBLOC is a non-purpose revolving line of credit using the securities held in your brokerage account as collateral. “Non-purpose” means you do not have to use the proceeds for a specific purpose like you do with an auto loan or home mortgage.  Basically, you can borrow cash against the value of your investment portfolio to finance basically anything from travel and college expenses to home renovations and buying a car.  Pretty much the only thing you can’t do with an SBLOC is use the money to purchase or trade securities.  This “easy money,” however, doesn’t come without cost or risk.

Typically, an SBLOC agreement will allow you to borrow between 50-95% of the value of your investment portfolio depending on the value of your overall portfolio and the types of investments in the account (i.e. stocks, bonds, etc.)  The interest rates charged on an SBLOC usually follow the broker-call, prime or LIBOR rates plus some stated percentage. SBLOCs typically require you to make minimum payments every month, oftentimes the minimum payment is the calculated interest amount. Because the published interest rates fluctuate, the amount of interest you are charged daily may also fluctuate.