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Taking a 401(k) Loan to Buy a Car: A Good Idea?

PBS NewsHour's Paul Solman provides his answer

(From time to time, PBS NewsHour Business and Economics Correspondent Paul Solman  answers money questions from Next Avenue readers, as he does below. If you have questions for Solman, email Next Avenue and we’ll let him know.)

I’m retired and 66 years old, working part time on as-needed basis. I need to replace my car and plan to buy to buy a used one. Is buying it with a loan against my 401(k), a good idea? — Robert Gill

Paul Solman:

Depends on your alternatives, Robert. If the only other way to buy the car is a standard car loan, then yes, I’d borrow from my 401(k), because I’d undoubtedly be paying it back at a lower — perhaps much lower — interest rate.

But if I had enough money sitting in a bank, I’d be inclined to spend that before borrowing, as I’d be getting no return at all on the bank account, while I would be getting a return on the money in the 401(k).

Admittedly, there can be a practical problem in draining a bank account: I might not have enough cash easily accessible to cover an unexpected expense. Yes, I could always borrow from the 401(k), meaning that it can be used as a rainy day fund. But it can take time to get the money, and if I were to need it right away…

That, at any rate, is how I have thought about the problem when faced with it years ago (though not involving a car purchase).

As with all economic decisions in life — as with all decisions, period — it’s a matter of weighing the costs against the benefits. Hard to calculate what the benefit of a cash cushion in the bank represents for you, but since it hinges on peace of mind, you’d know better than I.

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