401K to Finance a car?

[sladesurfer]

I was thinking taking out a loan on my 401K to Finance a car. I looked at it and my offer is 3.9 apr with options 12 to 60 months. A co worker of mine did it couple of years ago and he said it was the lowest apr compare to bank loans. Now hes 401K is paid in full. What are your thoughts?

[nycsimone]

Probably one of the worst things you can do...unless your credit score is so bad that you either can't get financed OR your interest rate is in the double digits on a car loan.

[AZ-Jeff]

You should only touch your retirement money as a last resort. Interest rates are much lower today than they were a couple of years ago. I assumed you've shopped around for rates. Without knowing your credit history or score, it's hard to give you a definitive answer but I would find another way to finance your new car purchase.

[Anonymous]

The real rate on a 401k loan isn't the stated rate. The real rate is that rate plus the lost earnings on the balance.

If you have a defined contribution plan (typically a pension from a public sector employer) the rate is the actual rate.

[sxa001]

Borrowing against your 401K is rarely a good idea and often a terrible idea.  Used or new car, if your credit is half decent you can probably do a better rate than 3.9% right now, and if your credit doesn't allow that unless you absolutely need a vehicle now you would be better off working to improve your scores instead of borrowing against your 401K. 

[Anonymous]

Not a good idea for reasons already stated by others above.

Another big consideration: should something change job-wise, such as taking a different job, getting fired, etc., any outstanding loans on your 401(k) become due in-full sooner. If you're unable to payoff the loan you're forced to take the outstanding balance as a distribution and subject to taxes and penalties. This is not a risk worth taking for something like a car in my opinion.