Now, Aladdin's kin would inherit this vast fortune, but Aladdin, who is doing pretty good for himself, would like to stop working at the Agrabah Bazaar, and enjoy other pursuits of his own choosing. He sees that the treasure loan would actually continue to accumulate (magic coins or something), and he would be adding more to it with a loan, so he does so, reinvesting the loan money so he can use it when he retires early.
Alright, I started digressing at the end. Here are the pros and cons:
Pros:
-You can tap into money you can't touch, and turn it into money you can touch.
-If you have had any growth, you can safely take the money out to compensate for any taxes/penalties incurring if you default. i.e. Your total assets, while smaller, are still in the black.
-You pay back more interest *to yourself*. This may not make up for the gains in the market, but if you blow it all at a casino, you have only yourself to blame. If you reinvest it for dividends or even long/mid-term growth, then you can probably make it up or at the very least break even.
-If you use it to pay off a home loan, or to buy a home/property to reduce your mortgage, then more money goes to you than to the bank, which is a waste.
Cons:
-If you default, or lose your job, you will have to either pay back the loan immediately, or take a 10% penalty and pay taxes on it. If you lose your job early in the year, i wouldn't worry too much about the tax portion - it counts as regular income. If you lose your job on the last week of December, then I guess you get a double whammy. This is probably the biggest gotcha, and if you are just starting out, probably not a good idea. If you have confidence your job is secure, and you have money in other areas, or if you are reinvesting it, probably not a big deal.
-You pay back the pre-tax loan with post-tax dollars. Once again, you need to run the numbers to see if this is a win in the long run. Always assume that when the 401k starts paying out, you live in a socialist country with a daunting tax rate. Perhaps the government will run efficiently someday and we won't have hardly any taxes, but I wouldn't bank on it. Most first world countries are going into a globalist agenda which doesn't bode well for the latter outlook.
-Origination fees, for mine, $50. Run the numbers.
In my situation, it is a no-brainer. As soon as we could pay off our house with a 401k loan, we jumped at it. I turned a 30 year loan into a house paid off in 12 years (this is after re-fi with lower interest rate and reduction in loan term a few years in). I have a bit left to pay off on that 401k loan, but if I default, I'll still end up better than throwing money away at some bank in interest. I had been paying extra payments as well just to get the 401k back to where it was, before I found a place to put my extra money.
Now my 401k has gained 17% in the last year, and 8.5% since January 1st. Not too bad, but again, money I probably won't see. So why not spend it now, and turn it into something I can use before age 65? I'll never see Social Security, and I've been paying into that. With property and assets and the 401k, my wife is well taken care of. Besides, I'm only borrowing a small percentage of it. In the end, if it works out, I'll be able to actually have a retirement.
Now, as eager as I am to start finishing my initial investment, I need to wait. 401ks have to sell off your assets equally to accumulate the money needed, wait 3 business days for the settling, then transfer to your financial institution (that's what I'm waiting for.. 5 business days later). Then I need to transfer it to my broker - I don't have a direct line to my broker from my 401k, hence the wait. The loan will be paid off in 4 years - I took the maximum amount of time and will pay it off at my leisure. Who knows, once it is paid off, I might do it again!
I'm assembling my list of initial purchases and researching while I wait, so I guess it is a good thing in the long run.
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