Life is full of unplanned and unexpected moments. While spontaneity may sometimes be a welcome occurrence, there are times when the unpredictable may end up taking a toll on our wallets. When unplanned expenses happen, obtaining the funds needed to cover them may make using your 401k to pay off debt seem like a great solution. However, there are plenty of options such as short-term personal loans that enable borrowers to handle unexpected expenses, without jeopardizing retirement savings. Here are some benefits and limitations to using a personal loan vs. a 401k loan.

What’s Good About a Personal Loan?

Personal loans may offer quick funds for many of life’s emergencies. With a personal loan, users may borrow a fixed amount of money for a variety of reasons. These reasons include debt consolidation, credit card refinancing, home improvement, moving expenses, and other major purchases. Personal loans may also help borrowers manage medical bills, car issues, and even parenthood.

Personal loans offer fixed monthly payments that may enable borrowers to easily manage their payments. In some cases, borrowers may find that personal loans offer lower interest rates than most credit cards. Unlike credit cards, personal loans may not provide rewards points or cashback on purchases.

Should I Borrow From My 401k?

Borrowing from a 401k to pay off debt such as credit cards may be attractive for borrowers looking to obtain the funds quickly. Still, using a 401k loan presents borrowers with risks such as a decreased retirement fund. According to Credit Karma, borrowers will be subjected to income tax and a 10% penalty should they default on the loan. Before borrowing against a 401k to pay off debt, it is necessary to consider that while it may be easy to borrow against a retirement fund, doing so may develop a borrowing pattern with serious post-retirement implications.

What is the Better Choice: A Personal Loan or Borrowing From Your 401K?

Personal loans are a much better option for paying for life’s unexpected expenses than 401k loans. A personal loan allows borrowers to obtain funding without the penalties and taxes they could be subjected to with a 401k loan. While paying interest on a personal loan, a borrower may not miss the chance to invest for their future with interest earned in their retirement accounts.

Retirement savings are there for you to keep for your future. When faced with life’s unexpected expenses, a personal loan offers fixed-term repayment plans and convenient repayment. With a personal loan, you’ll receive the funds you need and can start focusing on achieving your financial goals.