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There are ways you can use your own financial resources for loan purposes.
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Representative George Santos has been under scrutiny for several reported grievances, and on Jan. 31, he shared plans to temporarily remove himself from his assigned congressional committees, according to the New York Times. Santos has been in the news a lot lately on the heels of admitting to fabricating parts of his resume and providing more than $700,000 in loans to his 2022 campaign, according to CNN.
Now, the reality is that there are rules candidates have to follow when it comes to campaign funding. But if you’re an individual consumer, you shouldn’t necessarily be afraid to borrow money from yourself if the option exists.
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Granted, you may have a host of outside borrowing options to explore, like taking out a personal loan or borrowing against the equity you’ve built up in your home. But here are a couple of other options to explore when you need money.
1. A 401(k) loan
If you’re saving for retirement in an IRA, you should know that these plans generally do not let account holders borrow against their balances. But 401(k) loans tend to be more common and widely available.
A 401(k) loan is what it sounds like — you take out a chunk of your 401(k) balance as a loan and pay yourself back over time. The upside of going this route, if your plan allows for it, is not having to deal with the process of applying for an outside loan and running the risk of rejection. Plus, when you repay a 401(k) loan, you’re repaying yourself, not a lender.
But you need to be careful with 401(k) loans, because while you might initially get a number of years to pay that money back, if you leave your job (whether willingly or due to being laid off), that repayment window could be whittled down to months. And if you don’t manage to repay your loan in full within that time frame, your loan will be treated as a withdrawal from your 401(k). If you’re under age 59 ½, that means you’ll be looking at a 10% early withdrawal penalty.
2. A passbook loan
A passbook loan lets you use your savings account as collateral for a loan through your bank. If you need access to $5,000 and you have $5,000 in savings, you can apply for a passbook loan and borrow that money without having to take it out of your savings account.
The upside of a passbook loan is that it can be fairly easy to qualify, since your own money is used as collateral. In fact, what will commonly happen is that funds in your savings account will be locked, so to speak, until your loan is paid off. This pretty much eliminates risk for your lender. Because of this, passbook loans tend to come with low interest rates.
A passbook loan could be a good means of building credit, since timely loan payments will count toward your payment history — a key measure of calculating your credit score. However, you may want to think twice before taking out a passbook loan.
While these loans generally come with low interest rates, at the end of the day, you’re paying interest to borrow money you already have. Now, if you’re able to lock in a lower interest rate on a passbook loan than what your savings account is paying, this option could make sense. But otherwise, you may be better off just taking a withdrawal from your savings unless you’re actively trying to build credit.
George Santos may be under fire for lending his campaign money, but you can rest assured that 401(k) loans and passbook loans are perfectly legitimate. Whether they’re the right choice for you, however, is something you’ll need to consider before moving forward.
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