What are the pros and cons of taking a loan from my 403(b) plan?
Many 403(b) plans offer a loan provision, but you should think carefully before deciding to take advantage of it.
Pros: You do not need to meet the lending requirements of a bank, credit union or other financial institution. In many cases, the interest rate is competitive and is paid back into your own account.
Caution: In some cases, the interest is paid back to the vendor, not to you. Only the principal amount of the loan is paid back into your account as you make payments. Ask your vendor whether the interest is paid to them or to your account.
In addition, most providers charge an origination fee and a servicing fee. These can run from less than $100 to several hundred dollars each year. Added on to the interest you pay, these additional fees can make loans from your 403(b) plan more expensive than loans from financial institutions.
Cons: If you lose your job, you'll have to repay the loan immediately or it will be considered a distribution, subject to ordinary income tax and a 10% penalty if you're younger than 55. In addition, the money you put into your 403(b) plan went into your account pre-tax, but you'll have to pay it back with after-tax dollars. Then, when you withdraw the money from your account in retirement, you'll pay taxes on that same money again. And, you will likely have to pay a loan origination fee. Finally, you will lose out on any potential growth you might have accumulated if the money stayed in your 403(b) account.
You may want to consider alternatives, such as a home equity loan or personal loan, before taking a loan from your 403(b) plan.
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