How to Determine If Early 401(k) Loan Repayment Is Right For You

Considering Repaying Your 401(k) Loan Early? Read This First.

When you took out a loan from your 401(k) plan, your payments were pre-determined on a monthly schedule, likely in the form of automatic payroll deductions.

For most 401(k) loans, you have up to five years to pay off the balance.

But what if you want to get out of debt sooner? 

In this article, you’ll learn about the ins and outs of repaying your 401(k) loan and whether it’s the right choice for you. 

Can a 401(k) Loan Be Paid Off Early?

The short answer is yes, you can pay your loan early.

You can talk with your employer or 401(k) plan provider about increasing the amount of loan payments each month until the loan is paid off. 

If you happen to receive a windfall sum, you could pay the remaining principal in one lump amount.

Some 401(k) plans don’t allow the addition of extra payments or increases to the monthly amount. In that case, paying the loan in one lump sum is your only option.

You can do this by redirecting the funds that would go towards your increased payments into a dedicated savings account until you have saved the entire balance.

Benefits of Paying the Loan Ahead of Time

When your money isn’t in your 401(k), it’s not growing.

The amount you deducted is no longer earning compound interest on the account’s balance. Instead, its value is depreciating because inflation is against you.

Choosing to pay off your loan as quickly as possible means your money will continue to work for you on the market.

Your employment situation is another factor when considering whether to pay your loan early.

If you lose your job unexpectedly, you’ll need to repay the full balance before the federal tax due date.

Depending when you leave your job, this due date could be substantially sooner than anticipated.

In such cases, it may be wise to pay off your loan ahead of time so can rest a little easier if you lose your job or if you decide to switch employers.

When Early Loan Repayment Is Not The Optimal Choice

Although no one likes being in debt, don’t drain your savings account or emergency funds to pay off your loan early.

If hurrying to repay your loan will result in significant financial stress, it’s wiser to stick to the loan repayment schedule. That way, you’ll have money on-hand for unexpected expenses.

One of the attractive features of a 401(k) loan is that you’re borrowing from yourself.

The outstanding balance and all the interest you pay will go back into your 401(k).

If you’re paying down other debt, such as outstanding credit card balances or student loans, focus on paying those other loans before the 401(k) loan.

This can save you money in the long run, as it prevents you from paying interest for longer on the other debt.

Why You Should Craft Your Loan Repayment Strategy with Expert Financial Guidance

Even with the information in this article, loans and repayments can be confusing.

Let our team of financial advisors handle the details every step of the way.

From contacting your 401(k) plan provider on your behalf, to meeting with you to discuss your financial situation and goals, our advisors provide expert advice to help you navigate your 401(k) loan repayment strategy.

Book a discovery call today with a financial professional at Titan Wealth to learn how we can help.