Recently a new option has become available for those that want to take loans from their 401k plans. Normally this is not recommended, but as with everything, sometimes the situation may merit this action. However, instead of doing the standard loans from the 401k, there is now the option to have a debit card linked to the 401k.
With this option employees still have to apply to get the loan and the employer has to approve it. However, there are some benefits to this option versus the traditional way of taking a loan.
For starters, with a traditional 401k loan, the employee is required to make certain monthly payments that are usually deducted straight from your paycheck. Usually, five years is the standard amount of time. During this time if you want to make more than the allotted amount of payment then you cannot. However, with the debt card loan you can choose to pay more if you wish. Which is a huge plus as that can allow borrowers to get out from under the debt in less time.
In addition, with a traditional loan if the borrower losses the job, then they immediately have to pay back the entire amount of the loan. If they cannot, then they lose everything. For example, if you have $12,000 in your 401K and took out a $5,000 loan. When you leave or lose the job and you cannot pay back the last amount of $500, you lose everything. With a debit card loan you still can pay payments even if you lose the job which means you get to keep the full amount of your 401k.
However, on the downside when you take out a debit card 401k loan you pay interest that is usually higher when compared to the traditional loan. In addition, the extra interest that is paid goes into the debt card companies pocket. If you find that you must take a loan from your 401k, then compare your options and choose which will fit you best.