BOA Loan vs. 401K Loan

[Anonymous]

Ok, here is my situation - any thoughts would be appreciated.

My DH had a BOA Credit Card that we used a balance transfer offer to consolidate some debt to a while ago.  At some point, they jacked the rate through the roof.  When I called them, there wasn't any specific reason that they could give me - just that the terms of the balance transfer were up and that was the new APR on the account.  (I don't recall exactly what it was - 26% or something crazy like that.)

They wouldn't reduce the APR on that account, but they did offer to open a Gold Option loan in my name that could be used to pay off the CC in his.  Not a great interest rate, 22%, but better than what we had - so we did it.

Now, I am trying to find a solution to get rid of the 22% rate.  I've called - they won't adjust. 

I can take a loan against my 401K at 6%, and do payroll deduction to pay off this line completely.  I know that most don't think this is a good idea, however, it is killing me to be paying 22% on this.  If the interest on the BOA line was lower, I wouldn't even consider it, understanding that I will be paying post tax dollars back into my account and will lose the opportunity to earn returns on the money - but the amount of interest I'll save on the line I think outweighs in this case.

I am 34, and my FICO score with all three agencies is 724.  I think getting this $20K BOA line off my credit report will improve my score.  In addition, the payment I will make to my employer each month will be less than the payment I am making to BOA right now, so I can use the additional cash to pay extra on our other CC or our HELOC.

[fishbjc]

I did a 401k loan to pay off debt a few years ago.  If it gives you *peace of mind*, then why not?  Before you do though, have you tried to join NFCU?  Their rates are pretty decent!

I think getting a good nights sleep is important.  When you have debt looming over your head, the best thing to do is pay if off quickly using the method that gives you satisfaction.

[Anonymous]

Having a 401K or other savings are good....IMO  I would do just about anything to get rid of that % rate!

I would also make extra payments to get the 401K loan off ASAP!! By making double payments on it...you will still be able to make extra payments on other loans.

Be very sure before doing anything about this though!

[marty56]

IMHO I would not take 401k loan out to reduce the interest.  Dave Ramsey and others say it is never a good idea to take retirement or HELOC money to pay unsecured debt.

If you do this you need to take a hard look at how you are managing your credit cards to insure that you are just not moving debt around but are actually paying it off.

It is also important that you dont run the credit cards up again after you get them paid down.

[Anonymous]

While most experts would say never use this as an option, I highly disagree. Who better to pay back interest but to yourself!! Think about it if you go to the back for a loan your paying the bank back the interest, yet if you take a LOAN from your money (401K) your paying yourself back. I think people ususally mix a loan with a a withdrawal which then you would have to pay the taxes on the money you take out. So the question I ask do you keep paying BOA 22+% or do you borrow money from yourself and pay yourself back at 6% interest. Do the math!! Get rid of the BOA!! 

[marty56]

Camille,  I sent you a PM.

[Lel]

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@Anonymous wrote:

While most experts would say never use this as an option, I highly disagree. Who better to pay back interest but to yourself!! Think about it if you go to the back for a loan your paying the bank back the interest, yet if you take a LOAN from your money (401K) your paying yourself back. I think people ususally mix a loan with a a withdrawal which then you would have to pay the taxes on the money you take out. So the question I ask do you keep paying BOA 22+% or do you borrow money from yourself and pay yourself back at 6% interest. Do the math!! Get rid of the BOA!!

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Since it is highly unlikely that your 401(k) is going to have a 22% rate of return, taking a loan from your retirement fund is a reasonable thing to do.

Many people talk about the "benefit" of paying interest to yourself, but it's not as neat as it seems on the surface. When you borrow from your 401(k), you have to pay it back with after-tax dollars. The interest is also paid with after-tax dollars. When you start receiving distributions from your 401(k), you have to pay tax on the distributions, since your original contributions were tax-deferred. There is no distinction between original contributions and those that you "paid back" to yourself. The net effect is that the money that you pay back into your 401(k) is taxed twice.

[Anonymous]

I would not recommend taking a 401K loan to pay off CC debt.  When you take money from your 401K you are going to be taxed twice on it.   You are taxed when you withdraw it and again you have to pay a penalty tax at the end of the year to the IRS.  This is tax free money!  Why mess with that? I'd look for another alternative before ever withdrawing from your retirement account.  Take the extra money you'd use to pay off the 401K loan and put it towards your CC debt. 

Message Edited by kball64 on 06-30-2008 03:21 PM

[fishbjc]

She's not taking a withdrawal...it's a LOAN.  It's not-taxable unless she defaults on it. 

[fishbjc]

Camille:  I'd definitely try the CCCS route.  They reduced my cc interest to 4%.