05 Jul Should I take a 401(k) loan to buy a car?

Q. I need a new car and I don’t have great credit, so interest rates on car loans are high for me. I could take a loan from my 401(k) which has a balance of $150,000 so I don’t have to worry about an outside loan. Are there any cons to this?
— Car buyer

A. It seems like you first need to look at the big picture.

You need to solve the problem: whatever is causing you to have bad credit.

Whether it’s late payments, unpaid bills or cash flow issues, you should address the problem, not the symptom of the problem, which for you right now is the higher interest rate on the car loan, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.

He recommends you forget about buying a new car, too, and instead consider a previously owned one.

Lynch said he hasn’t bought a new car in more than 20 years, and he holds them until they fall apart.

“My last car that I gave to my son had 210,000 miles on it and it ran perfectly. My ‘new’ car has over 100,000 miles on it,” he said. “Buy a new car and you lose a tremendous amount of money the minute you take it off the lot.”

On using the 401(k) for whatever can you buy, that’s a possibility, but it’s not without risk.

Lynch said he’s generally not a fan of this strategy because of the opportunity cost.

“If you had taken out a loan from your 401(k) a few years back, that would be a tremendous loss,” he said. “The reason is that they sell your investments to give you the money for your loan, so you lose the growth of that money, literally for the rest of your life.”

Plus, if you leave your job, you’re going to have to pay back the loan, otherwise it will be considered an early distribution and you could owe taxes and penalties.

So, dear reader, drive around a 401(k) loan with caution.

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This story was originally published on July 5, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.