Credit Score News, Tips & Advice
Website CertifiedPrivacy Protected
Credit Score News, Tips & Advice « Credit Scores > Credit Score News > 401(k) Plan an Option for Low-Credit Consumers

401(k) Plan an Option for Low-Credit Consumers

By Sally Maison
Published: Wednesday, October 28th, 2009

Economists say borrowing form a 401(k) might be the better option for consumers who are having troubles with their credit score. The plan is normally used by American workers to save for their retirement while others are increasingly using it for holiday shopping. However, most consumers are having trouble with their finances, preventing them to get low-interest deal from lenders. With a 401(k) loan, economists say consumers can save as much as 20 percent on their overall interest costs. They add that the plan has low qualification requirements which makes it very ideal for people with poor credit scores.

401(k) Plan an Option for Low-Credit ConsumersTwo economists who work for the Federal Reserve Board in Washington suggest that consumers can save $275 per year or 20 percent of loan costs if they borrow funds from their 401(k) instead of settling for regular consumer loans which charge double-digit interests.

Even consumers who have poor credit scores can borrow at prime rates through the plan. Interest rates vary with each consumer, but they usually start at 3.25 percent. Prime rates are usually added 1 percent.
Borrowers who have trouble with their ratings still avail low interest rates since no credit checks are required. While some consumers worry that funds may not be available since everyone is rushing to a 401(k) aid in a bad economy, statistics reveal otherwise.

In 2008, when the economy was at the toughest America has seen in decades, only 18 percent of those eligible for a 401(k) plan carried an outstanding balance against it. That was the same percentage in 2006 and 2007, according to a study released by the Employee Benefit Research Institute and the Investment Company Institute this month. Last year, the median loan balance was $3,869 while 2007 has it at $4,167.

Under federal law, applicants are allowed to borrow up to $50,000 or 50 percent of their total savings – whichever is less. However, consumers who are still in the early phase of their 401(k) plans may be able to borrow 50 percent more than their vested balance. Internal Revenue Service (IRS) says consumers whose account balance is less than $10,000 may be allowed to borrow more than $10,000.

IRS representatives advise consumers that they may not be able to avail the exception if they are working for an individual company. They also tell borrowers that the number of loans they can avail and the amount of time within loans is limited by their plans.

Experts advise consumers to avoid missing out on 401(k) payments so they can avail a low-interest loan with they need it most.

No Comments

No comments yet.

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.