Getting a grasp of some 401(k) loan basics is of utmost importance before you actually apply for this loan. You must know, for instance, what conditions you must fulfill to become eligible for a loan. So, here are some 401(k) loan basics listed out that will help you with complete knowledge of what this financing entails.

How does a 401(k) function?
401(k) is a retirement account that allows employees to invest and save money for their retirement. This plan enjoys a tax-free status. The employees can opt for an amount to be taken from their monthly paycheck and put into their 401(k) amount. The employer too, can choose to contribute to this. Employer contribution differs from one employer to another. There are certain calculations for this. Some employers put in 50 cents or even $1 for every dollar that their workers put aside.

How do you borrow a loan against your 401(k)?
Here is a brief look at the process:

• Get details about the 401(k) loan you are entitled to.
• Figure out if you can borrow up to 50% of your account or 100% of your account. You might also fall under plans that impose a minimum loan amount.
• Inquire about how much interest you will have to pay. The interest that you pay goes back into your account, so do not stress about this too much.
• Figure out the repayment period. In most cases, you will have up to five years to repay the loan. But, if your plan permits, you can even make prepayments as well or extend the loan.
• You may also want to inquire about the prepayment methods. Employers usually make the deductions directly from your paycheck.

What are some pros of a 401(k) loan?
If you are planning to take a 401(k) loan, you would be glad to know the following benefits:

• The interest gets paid back to your account and is usually low.
• The repayment is simple and taken from your paycheck.
• You can set the repayment period of your loan.

Is a 401(k) loan transferable?
While getting familiar with 401(k) basics, loan transferability is one of the common questions that might come to your mind. If you have changed your employment to a new company, you cannot take a loan with your old organization. Rather, you could transfer your existing balance and then take the loan. But, you must check if your current employer allows for 401(k) loans. It is best to ask all these questions before you join a new company. Things can be different if you plan to transfer your 401(k) retirement plan to the IRA. If you transfer your old 401(k) to the IRA, you won’t be able to borrow loans from them.

Make sure that you make yourself acquainted with all the pros, cons, and ramifications that can come with 401(k) loans. Once you are through, you are all good to go.