Tap My 401(k) or Borrow From Family?

A while back (actually, almost a year and a half ago now… how time flies…), I talked about using a 401(k) to pay off credit card debt. I largely viewed the decision as one that makes terrible sense on paper, but the decision can make sense in the broader terms of the choices life hands you.

This brings us to a question from reader “Mandy” who is going through a similar dilemma:

I recently ended a lengthy relationship with a person who used my credit recklessly. I am now left with about $30K in debt, almost all of it high interest. My personal credit is very poor, so I’ve been rejected for a personal loan from the credit union and have no way to consolidate that debt.

This leaves me with two options: tap into my 401(k) (which has a balance of about $40K) or borrow money from my family. I’m currently 34 years old and have a job that pays well enough that I can make the payments on the debt fairly easily, but building any sort of emergency fund is very slow and I’m unable to make much of an extra payment on the debt.

What are your thoughts?

If I were Mandy, my first plan of attack would be to call all my creditors directly. Call up every single lender and every single credit card company and play a little hardball with them. Request a rate reduction from each one. If you hear “no,” ask to speak to a supervisor. Tell them you’re going to have difficulty paying the bill. Ask if there are any balance transfer offers available to you.

In short, seek out everything you can do to get the debt itself into better shape. You’re likely to hear a lot of “no,” but even a few “yes” answers sprinkled in there will make all the calling worthwhile and take some of the heat off of your shoulders.

The next thing I’d do is look for sources of liquidation in my life. Do you have any items you could sell to help reduce some of that debt? Do you have a car in the driveway that you rarely drive? Do you have some old collectibles with significant resale value? If you can liquidate some things and use those to pay off the worst part of the debt, you’re likely in far better shape.

Once you’ve done these things – and assembled a debt repayment plan – and you’re still in a harrowing situation, then it’s time to consider the choice between borrowing from family and draining your 401(k). Neither choice, incidentally, is a good one.

A note: when I repaid my own debts, I did tap into a supplemental 401(k), though I left my primary 401(k) alone. My employer required all savings beyond the amount they would match to be placed into a distinct supplemental account, and I was contributing 2% beyond their match. It wasn’t much, but I did make the choice to tap it.

So, which is it: borrowing from family or tapping the 401(k)?

The first thing I’d do before making that choice is to carefully look at my debt repayment plan and figure out how much I actually need to borrow. Likely, you don’t need to borrow the whole $30K. Instead, you just need to eliminate some of the debt, getting rid of just a few of the monthly payments.

Once I had a grip on the amount that I needed to borrow, I’d collect all of the work I had put in thus far and talk to the person I wanted to borrow money from. Lay out everything – no hidden secrets. Let them know your exact situation from top to bottom.

Doing this will do two things. First, it will make that person into something of a mentor for you. That person knows your situation – they can become a helper (offering up good ideas) and a cheerleader (pushing you along to success). Second, it will make clear to the person you wish to borrow from the seriousness of the situation – and your seriousness in tackling it.

Having done all of this groundwork, and even given the general concern I have with lending money among friends and family, I would ask for a loan from a family member before tapping my 401(k).

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  1. Erick says:

    I borrowed from my retirement about 2 years ago before the market tanked and I “think” it was a good move. According to the plan, I pay myself back at 8% interest over 5 years and am now buying shares at a fraction of what they used to cost. I have to believe I am ahead even with compounding interest losses figured in? I am curious as to other peoples thoughts….Am I correct?

  2. savvy says:

    I wouldn’t suggest either since the reader has a salary that pays well enough to manage the debt. I agree with the recommendation to try to get the interest rates lowered. I didn’t see the interest rates listed but if she can’t get a loan through traditional means, she may want to consider peer-to-peer lending such as Prosper.

  3. Mandy is in a tough spot. Your suggestions, Trent, provide her with some solid options and Hope. I like how you let her know it is unlikely she’ll need to come up with the entire $30K all at once. This, hopefully, will take away some of her stress and help her attack the situation more clearly.

    I’m sorry that weasel took advantage of her. What a sleazeball. I hope she recovers and will let us know of her success. I wish 30,000 readers could send her one dollar each.

  4. Dean says:

    Personally,I’d hammer the 401 for the max amount!It’s losing value today,so it may not be worth much more soon.Your paying the interest to yourself,buying new share’s at lower price’s,good if the market ever come’s back,and you need no credit for the loan.

  5. Xtina says:

    If I were the family member she wanted to borrow money from, I would be a little upset that she has $40K in a 401(k) at least somewhat available to her. She also has a good job with a decent salary; instead of putting her family member in an awkward position and possible hardship, she should take steps to manage paying the debt off herself.

  6. Rachel says:

    That’s a really neat idea, actually. I would send her a dollar. It’s an awful experience having someone you trust take advantage of you that way. Best of luck, Mandy!

  7. Johanna says:

    I think it depends on Mandy’s family member’s financial situation and personality. $30k, or even a fraction of $30k, is a lot of money, and I would make sure not to ask to borrow it from somebody unless I was pretty sure they could afford to lend it. Also, I would make sure that the person I asked was comfortable standing up for herself, comfortable saying “No, I’m sorry, I can’t afford to help you” if that is the truth, and comfortable speaking up right away if there turned out to be a misunderstanding of some kind, rather than letting it fester and lead to resentment that could mess up the relationship. If Mandy doesn’t have any family members that meet those criteria, then maybe she should rule out borrowing from family.

    If she does decide to borrow from family, I suggest that she and her family member sit down with the book “Isn’t it their turn to pick up the check?” (Trent reviewed it a while back, I think.) It’s written in a humorous tone, but it describes some of the serious problems that can crop up when family members borrow from one another.

    For example: Suppose Mandy borrows money from a relative at a low (maybe even zero) interest rate, and works out a schedule for paying it back. While she’s paying it back, she receives a windfall (maybe a large gift or promotion) that puts her in a better financial position than her lender. Should Mandy keep making the payments as planned, or would the lender feel that her generosity had been taken advantage of? Contingencies like that are best discussed in advance, I think.

  8. Used her credit recklessly?

    So was this legal use or illegal use? And why did she allow this to happen?

    No, don’t use your 401k. Get on a budget, get a second job if you have to, and pay down the debt. And no, don’t borrow from family, that’s even worse.

    She allowed this situation to happen, she needs to clean it up by herself so she learns not to let it happen again.

  9. Craig says:

    I am a firm believer that if you get yourself into a situation (which Mandy didn’t directly, but indirectly by being with the fellow) she should be the one to get herself out of it.

    It would be different if she wasn’t ABLE to get herself out of the situation by herself, but she is. So really the difference between borrowing from herself and borrowing from a family member ends up trying to make her life easier.

    She got herself into a situation, she’s able to get out of it without causing a hardship to someone else, so she should pay the consequences of setting herself up for this issue.

    It’s not that I don’t have any sympathy (believe me I do), I just think that in this case where she’s able to pay back the debt without involving someone else she should accept the full consequences of her actions.

  10. MBirchmeier says:

    @Erick: It was a ‘good move’ for you but it sounds like you might have gotten lucky.

    It sounds like this was a case where you timed the market just about perfectly by getting a large chunk of money out of the market when it’s high, and buying back when it’s low.

  11. I’ve got a better idea. Go after the bum who used her credit. Or was that part of the story fabricated as a cover for her own bad credit habits? If so, get some individual financial counseling to get to the root of the problem before making a big decision like this.

  12. Martha says:

    Just keep in mind that there are rules on how much you can borrow from your 401K. With mine, you can only borrow up to 50% of your vested total, up to a certain $ amount. I’m not sure if that’s a universal rule.

    I’d go along the path of asking the companies to lower your interest rate before borrowing from the 401K or family. She states she can handle the debt payments.

  13. Seth says:

    Agree, to some extent she let this happen. 30k doesn’t usually build up overnight. Be interesting to see how much of the 30k was spent on dinner and vacations for both. But relationships make people do strange things so I understand.
    Anyhow, I would try to get the money from him. She probably still carries some weight with the guy, his family, etc. I’d lean on him hard while trying to get the rates lowered. I’d sell anything I didn’t need, and cut back on spending.
    I wouldn’t borrow from family. Seriously, how much of an ass would you feel like telling them that the person your brought to Thanksgiving and everything built up all of this debt on your credit cards and could you please give me some money?

    Borrowing from 401k is almost always bad. What happens if you lose your job? – not unlikely today.

  14. No Debt Plan says:

    Like Dave Ramsey says, would you borrow money to invest? If you look at it from strictly that example, you would say no, liquidate most of the 401k, and start over investing.

    However, I would ask if you would borrow money to pay off debt? Then the question gets a bit more fuzzy. We don’t know what her free cash flow is. I would follow your advice, ask for rate reductions and look for balance transfer opportunities as long as she can pay off the debt before the rate resets.

    Lesson learned here: unless you are married, why share any sort of financials with another person?

  15. Adrienne says:

    I’d like to offer an alternative option – peer lending (prosper etc.). You should be able to get better rates than credit cards and you won’t endanger your retirement or relationships.

  16. Frugal Dad says:

    If her credit was used illegally then she needs to file a police report and contact the creditors’ identity theft/fraud divisions. If this happened knowingly, or she is unwilling to press charges, then she will have to clean it up herself.

    I like Adrienne’s idea of looking for a peer lending option. If she told her story on sites like Prosper or Lending Club she may be able to get more favorable terms, despite her poor credit. If her current creditors are unwilling to work with her, this might be an option.

  17. steve says:

    Since “Mandy” has enough income to make her payments, I would support her asking a family member or members for a loan, substituting interest payments to CitiGroup or whatever for, say, a 7 or 8% interest rate to a family member who may have ample cash already invested in CDs, giving them a better return on their money than they are getting currently, and allowing them to be of assistance to a family member. The key here is that a) I am assuming that Mandy has her act together and will make those payments and b) when you take out a loan you make up loan documents and have both parties sign them. There should be no “agreements in the air”, only on paper. Write out all the contingencies that you can think of, along with the loan payment schedule.

    Whenever I borrow money from ANYONE, I offer terms to them and make it worth their while. Typically I offer them a higher rate than they are getting at their bank, because, face it, if someone lends Mandy $30,000, they won’t be able to turn around and get the cash before the term ends as they would it it were in a bank cd. So they deserve a higher interest rate–more like the rates available on a commercial bond. Hence, my suggestion of 7-8%. That’s more than fair, and I insist on paying interest because it makes it clear that this is a LOAN

    Make up a payment schedule with your offer and present it to them. Once you have an agreement, stick by it and make each scheduled payment. I would have no problem with that, as long as the other person understands the terms. I probably would not be cashing out my 401(k) at this time with the financial markets as they are.

  18. steve says:

    It may even be possible, as part of the payment arrangement, to arrange to deposit the funds to their account directly. That way they don’t have to look for, or deposit a check–which is one of the reasons that people don’t like making loans, the hassle of a) “looking” for payment and b)the need for making additional banking transactions.

  19. almost there says:

    Mandy could join my credit union through the NMFA by buying a $20 membership in that organization. Then she could apply for a visa card with a 5.99% BT interest rate to consolidate her other credit cards.
    https://www.penfed.org/membershipApplication/2008/nmfa.asp

    I wouldn’t tap the 401k, esp. since the market is in a big slump. Good luck.

  20. Donny Gamble says:

    I say Mandy showed borrow from family, just makes sure she writes up a written contract or agreement saying that she borrowed the money and is going to pay it back

  21. Cathy says:

    Hi Mandy, I feel for you. Your story is similar to mine. I had a boyfriend with bad credit. I had good credit. I thought I could help him get his finances in order, and instead he dragged me down to $35,000 in credit card debt. If you’re not married, it’s really hard to go after someone. Really stupid, I know. I’ve been there. I’ve been a pretty smart girl in most ways but love.

    I had about $6,000 in cash (that I wisely kept away from him) and I used that to pay the minimums on my cards until I got settled. It took me 5 years to pay off the debt. I know it’s not popular opinion around here, but if I had a $40K 401K, I would have tapped it to get rid of the debt as soon as possible. Maybe not all of it, but a portion of it. The reason being is because while I had a $35K debt hanging over my head, I had no security. I am really good with my personal finance, and since I’ve cleared off my debt, I’ve been doing nothing but save, save, save. My non existent retirement fund during the 5 years of debt has now been growing at an astronomic rate. I’m 34 years old, and at this rate I should retire by 55.

    It is my opinion that you can’t realistically have a retirement fund until you clear your debts. While you have debt, your money should pay for your debt and an emergency fund. It’s not popular opinion around personal finance blogs, I know, but I know from personal experience how quickly I’ve been able create and fund a retirement fund. And the security from having the debt gone for good (and the last reminder of my failure) is priceless.

  22. AnnJo says:

    Trent, the phrase “tapping into a 401(k)” can mean two things:

    1) Making a taxable withdrawal, or

    2) Taking out a loan from the 401(k).

    If Mandy cashed out/withdrew her $40,000 401(k) balance, she’d pay taxes at her marginal rate plus 10%. She would probably pay at least $10,000 in taxes out of that $40,000, netting her $30,000 or less. (That’s assuming that all of her employer’s contributions have fully vested, otherwise she might find there’s not really $40,000 VESTED funds in there at all.)

    If her 401(k) plan allows her to borrow, her maximum borrowing ability will likely be half the balance, or $20,000, repayable over five years. There would be no tax, she’d be paying the interest to herself, and she’d still have to deal with the remaining $10,000 in credit card debt somehow.

    Mandy, I urge you to “borrow from yourself” rather than from family. If you have a decent job, have a 401(k) with $40,000, and have learned your credit and relationship lessons from this bad experience, you are not really in an emergency situation. Save the family resource for truly hard times – when you’ve lost your job and been unemployed a few months, or something truly serious, not what is basically a bump in the road.

  23. Des says:

    Relationships are worth more than early retirement. It is very risky borrowing from family (even with docs) as I’m sure Mandy knows. Borrowing from family should be an absolute LAST resort, only after all other options are tapped, including cashing out a 401(k).

    As for peer lending, I believe Prosper is in a “quiet period” right now while they file with the SEC to open their secondary market, so its not really “peer-to-peer” at the moment.

  24. Cathy says:

    Prosper.com and LendingClub.com will only take borrowers at above sub-prime rate of 640 and above. (Prosper might be slightly lower). Mandy says she has poor personal credit, so social lending probably won’t be able to work for her here.

    AnnJo has the best option, in my opinion. If Mandy at all as the option to “borrow from herself”, that needs to be the first line of rescue.

  25. imelda says:

    ‘Tis the season. I’ll chip in $20 if others, like Rachel (comment 4) are up for pitching in.

    That said, Trent, it’s interesting to note that even though many of us (you, Dave Ramsey, myself, Suze Orman, etc.) blast lending to friends and family as a horrible idea, to be avoided at all costs, it can be a better option than doing something as ordinary as borrowing or withdrawing from a 401K account.

    It makes me think about all those callers to Dave Ramsey’s show who ask whether they should borrow from friends or family, and he says no. If they’re in really dire straits, what other choice have they got?

  26. Troy says:

    I would not borrow from family. I would not borrow from anyone…bank, cc, etc.

    She has the money in a qualified retirement plan. So what. Take the penalty and pay off the debt. Forget the taxes. You have to pay taxes on all other income you recieve, so there is no difference.

    Clearing this weight away will make life easier, and in turn make it easier to re-save for retirement from now on.

    Actually, I would fully fund a large emergency fund before I started building the retirement back up.

  27. Martha says:

    One more thing against the 401K borrowing – if you leave that employer, the loan will probably be due in full soon after. Need to look at the 401K rules about that one.

  28. PF says:

    Ugh, Poor Mandy. That stinks. I’m sorry. I’d send a buck too.

    I’ve borrowed from my parents and offered them a much better rate than they were getting from the bank. Mine was to finish a home building project that went bad. We knew that if we could just finish and convert our construction loan to permanent financing, we could refinance and get a home equity loan to pay off my parents, which is exactly what we did. They made a good return and we did much better on our rate than an unsecured loan.

    We had to use a lot of credit cards during the above homebuilding project-gone-awry mentioned above, to the tune of about 75K. Yes, you read right! Our credit score went from 800 to 670. However, once we got the home equity loan and paid off the credit cards, our credit score, in a matter of 3 months, jumped back up to the upper 700s. So, Mandy, by borrowing the money to pay off the credit cards, I’m guessing that your credit score, like ours, will also jump back up and you’ll qualify for some better loan options.

    I wish you luck and let’s just hope karma catches up with that cad.

    Paula

  29. Krista says:

    There is another alternative. Mandy said she can’t get a consolidation loan based on her credit. After she speaks to the creditors and gets a repayment plan drawn up, she can ask a family member to co-sign for a consolidation loan.

    This way the family member isn’t liquidating their reserves to give her the cash. Although there is still risk for them it won’t cause the same strain that it would if they had to ask for her payment every month. And she can probably get the payments under control so that she can avoid draining her own retirement.

  30. Jim says:

    ToughMoneyLove said: “was that part of the story fabricated as a cover for her own bad credit habits?”

    That is a totally baseless and completely unfair assumption.

    Jim

  31. George says:

    Don’t borrow from your retirement assets as they’re often protected from creditors in the event of bankruptcy.

    So far it sounds like Mandy has only asked one loan institution for a consolidation loan and been rejected. If the rate reduction requests don’t work, she needs to ask more firms until she’s certain there’s no hope before approaching relatives.

  32. Rap says:

    “Call up every single lender and every single credit card company and play a little hardball with them. Request a rate reduction from each one. If you hear “no,” ask to speak to a supervisor. Tell them you’re going to have difficulty paying the bill. Ask if there are any balance transfer offers available to you.”

    As someone working in the credit card industry, I have to take exception to, or at least qualify some of the advice given.

    Keep in mind that in order to get a rate reduction, it’s not just a matter of screaming until you get your way. If you have had late payments, over limit issues, returned checks, you’re at higher rates because you’ve already shown you are a problem customer.

    I know this sounds harsh, but the hard core reality is that you have to have a *stellar* account in order to get a rate reduction. So please look seriously, and *realistically* at your payment history before you try this and be aware that in the current credit environment, you won’t get a rate reduction if you have any black marks in the last year. That means no late payments at all.

    You can certainly ask for a supervisor but please be aware that you have no *right* to speak to a supervisor. Keep in mind just how many people advise you to demand a supervisor when you don’t get what you want. Again, consider what your history with your account really looks like. Trent is right in that there’s nothing wrong with asking but sometimes you are going to hear “no” and it’s rarely because the person on the other side is simply being mean/hateful/stupid.

    And the one piece of advise I really disagree with is suggesting you’re having difficulty paying your bill as a bargaining tactic. Suggesting you can’t pay your bill is a huge red flag that maybe you won’t pay your bill. These days, accounts are being watched very carefully. With credit being tight, it will get noted as a potential problem.

    Please also be aware that namecalling, guilt tripping and all around insulting the person you speak with rarely helps your case. If you don’t like being treating like a dumb high school drop out peon who is clearly incompetant, possibly retarded, and not empowered to handle simple tasks… then do you really think that the person you just said this to really feels like doing you a favor?

  33. Lurker Carl says:

    Borrowing from the 401k is risky in good times, horribly foolish in a quickly deepening recession. She can only withdrawl 50% of the balance, which is decreasing dramatically each day if invested in stocks or stock funds. And she still won’t have enought money to pay off the debt. If “Mandy” loses her job, she must repay the 401k loan in full within 30 days.

    Cashing in a 401k is beyond foolish. She’ll lose almost half the money to taxes/penalties and still not have enough to repay the debt. Don’t fix one stupid mistake with another stupid mistake.

    “Mandy’s” poor credit means her credit lines are maxed out and she doesn’t pay her bills on time. If an institution which specializes in lending money doesn’t trust her, why should her family or friends? If someone lends her money or co-signs a loan, “Mandy” will have reassigned her debt to that person. $30K is not a trivial amount of money to write off, “Mandy” would then become responsible for a $30K income tax hit if that were to happen.

  34. Cathy says:

    I would not borrow the money from family members. I know my parents and grandparents would have done anything for me, and would have given me the money. However, it wasn’t fair to them. They worked hard all their life – I came from a self made family. I would have been taking money away from THEIR retirement funds. If I had the money in my retirement fund, why would it be fair to take it from theirs?

  35. Mule Skinner says:

    Luckily, I never succeeded in borrowing from a relative.

  36. chris says:

    I’m shocked so many people are recommending borrowing money from a friend/family member. If I were Mandy, I would do the following:
    1) Trim back my 401k contribution to only what my employer matches.
    2) Reduce living expenses (cable bill, dining out, cellphone package) to free up money for debt repayment.
    3) Go thru my credit report to verify, cleanup, & dispute late payments.
    4) Call to have my rates reduced. Check on balance transfer options.
    5) Sell unnecessary items on Craigslist. Ebay is too expensive.
    6) Look for ways to make extra money. Part-time job? Roommate?

  37. steve says:

    i’m shocked that so many people are shocked that so many people are recommending borrowing money from a friend/family member.

    Most of us got to where we are today through the support and investment of family members through our childhood, in bringing us up, educating us, and, to varying degrees of success, helping us grow to responsibility. How much did that cost family members in time and cash? Quite a bit. Yet some readers think it’s outlandish to look for family support, when often it was given for years and years freely without needing to be asked for.

    In my recent family history (going back 2 generations) my paternal grandfather bought a business (retail store) after a one year search while he was jobless in 1942, partly with his saved funds, and partly with a family loan which he repaid, presumable on schedule. Family members relied upon one another to have their act together, and often served as “back up” both in hard financial times and in times of opportunity. One of my friends started her business with a combination of funds, including (you guessed!) a business loan from one of her family members.

    My paternal great-grandfather paid for family and friend’s passage from Ireland, guaranteeing the US federal government to support them financially in the event they had difficulty finding employment (this was a condition of their admittance to the United States).
    That could be looked at as a family/personal loan? Was that wrong? Were those people wrong to improve their situation using their family member/friends’ financial support?

    I guess the main issue here is whether you are financially responsible and can deliver on a contract. If you can, and the family member is able and willing to lend, I don’t necessarily see a problem with it.

    That being said, from the info. Trent has supplied, It looks like “mandy” is not quite on that level, if she allowed someone to take advantage of her for that long. Hindsight is 20/20: She would have been better off giving the man a loan with a written contract if he was short on cash and she wanted to help him. Then she would have legal recourse that she doesn’t now have. Also, at each increment of indebtedness, it would have required a clear look at the sums being lent and (not) repaid, which probably would have limited the amount she ended up lending. But instead, it sounds like she commingled their finances in a way that jeopardized her financial security. If she is actually recovering, has adequate (and secure) income, and can service a loan to CitiGroup, she can probably do the same on a loan drawn from family funds, and do it in a way that is mutually beneficial for both her and her lending family member(s) It is a heavier emotional responsibility to borrow from family, sure, but that is incentive to be doubly sure you meet your obligations to them.

  38. Spiritwealth says:

    Yes, reducing just one bill gets the ball rolling. I recently went in for credit counseling to find out how to manage my budget, which went haywire with some personal issues in my life. The man told me to default on all my credit card so I could pay it off at pennies on the dollar, in settlement. He said I should go “whole hog.” I really think that’s bad advice. I was really tempted because he made it sound like a good deal, but I hate to stiff people, even the banks.

    So, I started negotiating with the lenders, instead. I got one loan deferred for an entire year! That made it easier to see a light at the end of the tunnel. Now, after all this, I find that I had other options. I found a way to increase income, and I am now only behind on one loan, instead of four. So, that’s my next negotiation point. But, if I had simply defaulted on everything, my credit would have been trashed and I’d still be nowhere near to setting things right. And, I would have had to tap my retirement accounts to settle the debt anyway, at pennies on the dollar. Not really a good deal!

  39. Emily says:

    I’d point out that the markets do have an effect on that choice. There are lots of other factors, as discussed already, but no-one’s brought up the markets yet.
    As the market drops, I’ve heard the reassurance that my retirement account has the same number of shares as it always did, hasn’t lost any real value unless I sell shares. Or, if Mandy’s 401k includes primarily stocks purchased when the market was high, a $1000 withdrawal now could represent $2000+ of contributions. It will be *very* difficult to get that value (number of shares) back into the retirement fund in a couple of years. My opinion would be that taking money out of the 401k is a very bad idea.

    Similarly, though, borrowing money from family entirely depends on the family member and situation. Does Mandy’s family talk about money? Do they loan money to each other? Do they have money to loan? Where is that money that she’d be borrowing – if it’s invested in stocks right now, then it’s unfair to ask the potential benefactor to cash those out at a low market.

    My suggestion would be (1) accept that Mandy will be in debt for a while (2) reduce any interest rates as possible (3) talk about a family loan of $10k or less to cover the highest interest rate parts of the debt.

  40. Andy Jasner says:

    I would do everything I could to avoid tapping the 401k. You’ll never be able to recoup the money. I wouldn’t borrow money from family, either. I would try and reduce my living expenses as much as humanly possible. I would try and call to get my rates reduced. Then I would find anything and everything to sell on craigslist to clean up this mess. Maybe a part-time job, too? Sacrifice now to be better later. This is a tough situation, no doubt.

  41. Cathy says:

    I’ve never borrowed money from friends (except maybe $5 for lunch when I forgot my wallet). I have loaned money to friends. I’ve never loaned them more than what I would care about if they never paid me back (they have). $30K is not a trivial amount, and it should be approached extremely delicately. They will want to know that you’ve exhausted all options. If you have a high paying salary, they deserve to know that you are downsizing your luxury apartment, selling extra things you don’t need anymore, etc. You’ll also need to disclose to them that you have a 401K with $40K in it. If your family is wealthy, then maybe it won’t matter much to them and they won’t want you to tap your 401K. If your family is not wealthy, then you are likely taking away some of their financial freedom. Their retirement horizon is probably in the next 10 years, and their options for recovering from that in a poor economy is far less than yours.

    If you choose to go the family route, you need to disclose everything – all your debts, how much you make, your expenses, what you are doing to take personal responsibility even if it’s a hard choice like getting a roommate, and your 401K. They have a right to say no. Just make sure this doesn’t make for unpleasant holiday visits.

  42. steve says:

    “If I had the money in my retirement fund, why would it be fair to take it from theirs?”

    Fair has nothing to do with it, as you are not taking from them, you are offering them the option to loan you money at favorable rates. Borrowing from family members means meeting your obligations and not shafting them.

    If you have any concern about their ability to loan you the money, you should give full disclosure to them about your finances and require full disclosure FROM them about theirs. Like, “how soon will you be in a position to NEED this money back? Are these time terms adequate to your needs?” How much money do you have available to you over the next x years? If you are uncomfortable asking these questions, or if either party has trouble conceptualizing this as a business agreement (not uncommon), then don’t go ahead. The money they lend you should be money they weren’t needing to touch for 5 or 10 years. I wouldn’t take a loan from someone a family member who couldn’t keep it straight was going to start feeling justified in analyzing how I spent my money. In that case, I would get the money back and pay it to them in lump sum immediately. Their only concern should be, “did he/she send me the checks he/she agreed to”. If it becomes apparent that the person is incapable of doing that, get the money in lump sum immediately and pay them back. Make sure there is no prepayment penalty in your loan agreement with them. In any case, you aren’t going to stiff your family, are you? If you don’t have confidence not to do that, definitely don’t attempt to go the family loan route.
    Also, keep in mind that family does not necessarily mean parents or grandparents. It could also mean a brother or sister or aunt or uncle if you have an appropriate relationship to them.

  43. Cathy says:

    @steve: You’re right – it becomes a business relationship. Which is exactly why borrowing from family/friends should be the option of absolute last resort.

    Trent has written on the dangers of lending to family/freinds many times. My philosophy is never to lend any money to family/friends that I am not prepared to never see again. Trent calls this “gifting” the money.

    http://www.thesimpledollar.com/2007/01/05/your-friend-or-family-member-asks-you-for-a-loan-what-do-you-do/

  44. Doug says:

    My does she have to borrow?

    “…have a job that pays well enough that I can make the payments on the debt fairly easily, but building any sort of emergency fund is very slow and I’m unable to make much of an extra payment on the debt.”

    Maybe she can have discussions with family members about possible future borrowing in case she should have an emergency before she builds an emergency fund. She definitely should try to get her interest rates lowered.

    I’m in a similar situation as her. I currently have a little over $30k in CC debt and $15k in student loans. I am single and make $33K a year and can still save a little and pay more than minimums. It’s going to take a while but each month is a little better than the previous one.

  45. steve says:

    @ doug:

    I think the point is, she said she is paying “high” credit card interest rates due to her poor credit score. I’d assume those rates could be 22% or so, although the rate wasn’t specified. That’s a crushing interest rate. Although she can (barely) swing it with her income, if she could cut that down to 8%, that would allow her a lot more wiggle room in her budget, build up and emergency fund, and generally be on more stable ground financially.

  46. JHP2 says:

    I would suggest Mandy take a look at Dave Ramsey’s Total Money Makeover. His Baby Steps, especially the Debt Snowball, may be ideal for Mandy.

    Note, I accidentally left this note on another post. Sorry about that!

  47. Anne says:

    This is not a cut-and-dry situation, as hardly anything involving money ever is.

    Since Mandy is employed there might be a lender willing to work with her. The reluctance to lend money basically comes about as a result of:

    1. No employment or:
    history of spotty, erratic
    job history;

    Employment that is not documented, i.e., “under the table.”

    3.

  48. Anne says:

    I would not recommend asking family members for help unless they have the money to spare and are willing to take the chance of not being paid back.

    She should try to find a lender. Since she has a job that pays well, the lender will look to see

    1. Current income to debt ratio as well as job history (checking for erratic employment history, if any);

    2. Pattern of bill payments: is there a chronic history of late bill payments or does it seem to come about suddenly (which would offer the benefit of the doubt that a personal hardship of some sort has precipitated the lapse in payments to creditors).

    Those are the major things that will be looked at. Of course, Mandy already knows that any lender aside from family and friends is going to charge her interest, the amount being dependent upon the above factors and others (credit score).

    Good luck; I think she can get someone to lend to her if she’s willing to accept that higher interest rate — which would seem reasonable to do, considering her likely dearth of options at this time.

  49. reulte says:

    I have to agree with Chris (#28) and go even further … Mandy is 34 with poor personal credit rating yet with a job which pays well enough to cover monthly payments fairly easily. . . so what she is actually asking for is to borrow money to build up an emergency fund.

    From my limited perspective, I’d say leave the money in the 401k, don’t borrow from anyone, learn to budget, get rid of (either temporarily or permanently) expense drainers as much as possible such as collections, car/car payments, eating out, magazine subscriptions or where ever Mandy discoveres her money is going all the while snowballing debt, asking for lower rates, etc.

    Yes, it’s scary and hard to do this. But leaving the 401k alone has one very useful purpose — it can serve as an emergency fund in a genuine, in-the-hospital, out-of-work, nowhere-to-go emergency; not a ‘my boyfriend used my credit card and now I’m in a bit over my comfort level of debt’ type so-called emergency.

    Maybe I’m sounding cruel and I truly don’t know all the details of Mandy’s situation — but here’s one piece of consolation for her. She didn’t marry him and have to pay an extra $3000 for a divorce.

  50. Jane says:

    Goodness. Such a bunch of righteous folks. You are 35! Borrow the damn money. Take a chance things will get better. Seize the day! And don’t go after him for the money. Just bad feelings.

  51. steve says:

    This falls squarely in the “not enough information” category.

    Important factors:

    1) What’t the interest rate, and what’s the minimum payment per month? For a 40,000 loan on credit cards, the minimum payment will be between $800 (2% minimum payment), done in about 5 years and 1600 (4% minimum payment, done in about 2.5 years) per month.

    1) What are the comparative interest rates, and can you reduce the differential by transferring balances or through other methods? If the interest rate is 6% your loans will be paid in between 2.5 and 5 years.

    2) If the interest rate is on the low side, unless you have a pressing reason (you will need a lump of cash to start a business, for example), there is probably no reason to borrow from anyone to take care of this. You have already said you can cover the payments. And the debt will be gone in several years anyways, after which you can start to build up savings.

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