There are a few financial tools that make experts cringe when they get brought up. While 401(k) loans may give financial experts plenty of reasons to worry, that doesn’t mean they’re actually a bad thing. Like any personal finance tool, they’re an option that can be used well in the right circumstances or turn into a mess if the proper rules aren’t followed. 

Financial experts worry about consumers taking advantage of 401(k) loans and hurting their retirement savings. It makes sense that this is a major concern when you consider how few people actually have retirement savings accounts in the first place. Whenever consumers sound like they could be taking their retirement savings less seriously, experts are going to worry. If you’re going to retire, you need to save. 

On top of this, 401(k) loans have a high risk of penalties if the specific terms of the agreement aren’t followed. These loans need to be repaid quickly, usually within one year. If the terms aren’t followed, the consumer may need to pay taxes or high penalties. That can be a severe hit to the borrower’s finances. 

However, when the amount can be repaid in a timely manner, borrowing from retirement savings can be a strong option when a large sum of cash is needed quickly and can be repaid on schedule. 

One of the reasons 401(k) loans are such a strong option is that there isn’t actually a lender involved, so they aren’t even technically loans. When a consumer borrows from their retirement savings account, they are borrowing the money from their own savings. This means that the borrower only needs approval from their financial institution, not a lender, which means that any interest paid on loan is just money going back into the retirement savings account instead of to a lender. It also means that the 401(k) loan doesn’t impact the borrower’s credit rating. At a time when the stock market is weak, it could make long-term financial sense for a borrower to make use of their 401(k) savings for an immediate need instead of in the stock market where they may be earning less for a while. 

The best way to determine if borrowing from your retirement savings is right for you is to consider your long-term goals and, preferably, speak to a trusted financial expert who can help guide you on your other options, the future of your retirement savings accounts, and how to stay safely within the rules of your individual retirement savings account plan if you decide to take out a 401(k) loan.