How Long Does It Take for a 401(k) Loan to Be Approved?

A 401(k) loan can be a good way to get funds from your retirement savings without having to get penalties and taxes that are associated with an early withdrawal. For those who are considering taking out a 401(k) loan, you may want to know how long it takes for the loan to be approved. Find out the answer below.

Overview of a 401(k) Loan

A 401(k) loan is defined as the type of loan that can be borrowed from yourself or from the balance that you have saved up in your retirement account instead of a lender. This fact makes it different from the other loans. According to the rules made by the Internal Revenue Service or IRS, it is possible for you to borrow a maximum of 50% of your vested 401(k) retirement savings up to $50,000.

Advantages and Disadvantages of 401(k) Loans

Taking a 401(k) loan has some advantages, such as:

    • The interest will go back to the borrowers.
    • 401(k) loans are different compared to a 401(k) withdrawal because they generally do not come with taxes and penalties.
    • If the borrowers fail to pay off their loan, their credit score will not get impacted because it will not be reported to the credit bureaus.

Aside from the advantages, there are also a few disadvantages of 401(k) loans, including:

    • The borrowers will owe taxes and penalty if they fail to pay off the loan.
    • The borrowers will have to say goodbye to investment gains while the money they borrowed is out of their 401(k).
    • If the borrowers resign from their jobs, do not get surprised if they have to pay off their loan right away or within a short period of time.

Time Needed to Approve a 401(k) Loan

For anyone who is wondering how long it takes for a 401(k) loan to be approved, there is no actual answer. Usually, it takes about a month. However, it may be sooner or later. There are several factors that can affect the process time of a 401(k) loan, such as:

    • Specifics of the borrower’s 401(k) plan
    • The precision and accuracy of the loan application
    • The administrative ability of the company in managing the 401(k) plan

Process of Getting a 401(k) Loan

If you want to get a 401(k) loan, you can follow step by step below:

    1. First of all, you have to meet your employer, which can be Human Resources or your benefits person. During the meeting, you should ask if it is possible for a 401(k) loan.
    2. If a 401(k) loan is possible, please read the fine print. While you already know the federal government limits on a maximum amount that you can borrow from your 401(k), you still need to find out the limit of the plan administrator. Beside the limit, do not forget to also ask them about your repayment schedule and the interest rate.
    3. If you have determined that the 401(k) loan is for you, you have to complete the required paperwork. The application process for it usually does not take too much of your time. It is pretty quick and easy. Plus, it may be possible for you to apply online.
    4. If your application is approved, your plan administrator will send your funds. The funds will be sent by check or direct deposit.
  1. After receiving the funds, it is time for you to make regular payments on the loan that usually starts after receiving the funds. There may be an option to automatically pay the loan from your paycheck. If you have money to make an early repayment, do not hesitate to do it.
  2. Even if you are in the process of repaying your 401(k) loan, you should continue making regular 401(k) contributions so that you can build your retirement fund without falling too far behind.

Alternatives to 401(k) Loan

If you do not think that 401(k) loan is good for you, you may want to consider the following alternatives:

Alternative 1: Use your savings or emergency funds

The purpose of having emergency funds or savings is to have money for unexpected things. This one is counted. It is better for you to use your savings or emergency funds instead of borrowing from a 401(k) because you will be able to save your money from a few things, including penalties, interest, and taxes.

Alternative 2: Get personal loans

Personal loans are counted as unsecured loans. They can be used for anything, including covering a large expense. It may be possible for you to borrow a maximum of $100,000. However, it can be less or more, depending on your credit. You have time up to seven years to pay off everything.

Personal loans are popular because they are known to be a more affordable alternative compared to most credit cards. However, it should be noted that they tend to have higher interest rates, especially if your credit is not robust. Another thing that making them loved by many is that it could make it easier for you to pay it off. By taking a personal loan, you do not have to put your retirement funds at risk.

Alternative 3: Get home equity line of credit

A home equity line of credit, which is also more known as HELOC in short, is one of the types of revolving credit. It is worth considering for those who have their own home. Apart from that, it is also good for those who have enough equity to borrow against. The way it works is similar to a credit card. Basically, you can take out the money every time you need it. However, there is a limit of what you are approved for. It is possible for you to borrow money from it for more than once as long as you are able to pay it off. If you fail to repay it, do not get surprised if you lose your home because it is secured by your home.

Alternative 4: Get home equity loan

Home equity loan, which is also called HEL, refers to an installment loan, unlike HELOC that is a revolving credit. This one has a fixed interest rate. Just like HELOC, HEL is also known as a second mortgage due to the fact that it is secured by your home. If you are wondering how much you can borrow, the answer varies, depending on how much home equity you have. If you get this loan, make sure to try your best to repay it unless you are ready to lose your home.

Alternative 5: Lower your 401(k) contributions

In order to reduce your spendings, you can consider lowering the amount of money for your 401(k) plan. By doing this, you will be able to save up. Besides, you can also afford unexpected bills. If things have gone better, feel free to increase your contribution again.

Bottom Line

In conclusion, the time it takes for a 401(k) to be approved is around a month. However, it could be less or more, depending on some factors such as specifics of the borrower’s 401(k) plan, the precision and accuracy of the loan application, and the administrative ability of the company in managing the 401(k) plan.

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