Before considering borrowing funds from your 401(k) plan, you must get acquainted with few a 401(k) loan basics. This kind of knowledge can make you aware of the various facets of this loan. Let’s take a look at five crucial 401(k) loan basics.

Paying off the loan early
When you borrow from your 401 (k), you have up to five years to make the repayments or you can even pay the loan in full. But you can also make the payment for your loan early. One of the ways of making payments early is by going for biweekly payments.

Biweekly payments mean you start paying every other week. Repaying half payments every two weeks instead of monthly payments will help you achieve the following:

• You might reduce the number of months on your payment schedule
• Since your loan balance will be decreasing continuously, you will be accruing less interest which is always a good thing.
• Plus, the sooner you finish your loan, the better it is for you as you can plan your other finances.

Using the funds
Borrowers can use the funds borrowed from their own 401(k) for various purposes. Some use it for major home repairs. Other uses include college tuition, vacation, costs incurred on medical exigencies, and wedding expenses. Experts recommend never using your 401(k) funds to repay debt, as this is a huge mistake.

Looking at the pros
A study of the 401(k) loan basics is incomplete without examining the pros of this loan type. The pros are:

• The interest goes right into your account.
• The interest is usually really low.
• You can set your repayment schedule within certain defined rules.
• Unlike other secured and unsecured loans, there are no credit checks because you are borrowing money from your contributions to the 401 (k) account.

Looking at the cons
While there are many pros, we must also look at the drawbacks of a 401(k) loan. These include:

• You would usually lose out on prospective profitable market gains on your 401(k) account.
• A default would incur penalties in the form of income tax.
• If during the term of your loan, you lose employment, you would need to immediately repay the whole balance which can be tough.

Some employers do not permit loans
Finally, one of the biggest points to keep in mind is that some employers do not give out loans on your 401(k) plans. This is something that they decide at the beginning when they set up the 401(k) plan for the company. Do a check with your new employer on whether you can avail a loan with them, as overlooking this can leave you cash-strapped when you need funds the most.

So, here we have 401(k) loan basics which tell you how well you can smartly handle borrowing from your 401 (k) funds.