The 401k loan is one of the most convenient ways to borrow money as it is not based on your credit history or your income. If you take out a 401k loan and decide that you are paying too much in interest, refinancing the loan can help you save some money.
Refinancing With 401k Funds
When you have an existing 401k loan, one option that you may pursue is refinancing it with funds from a separate 401k loan. If your company allows 401k loans, you can typically borrow up to 50 percent of the account balance through a loan. If you do not owe more than 25 percent of your account balance, you could potentially take out another loan from the 401k and use it to pay off the first one. This can work well if interest rates have decreased since the time you took out your first loan.
Before you can take out another 401k loan and use the money to pay off the existing loan, you will need to get authorization first. Not every 401k plan will allow you to take out multiple loans. The plan administrator may not want you to take out a second loan if you plan on paying off the first loan with the funds. You can check with your plan administrator to see what the rules are regarding this procedure.
Borrowing From Another Source
If you want to pay off your 401k loan and you cannot borrow any more money from your 401k, another option to consider is borrowing from a separate source. For example, you could borrow money from a home-equity loan or line of credit to pay off your 401k loan. If you have good credit, you may also be able to borrow through a personal loan. This typically only makes sense if you can save money on interest rates or if you are out of time to keep making payments on your 401k loan.
Consequences of Unpaid Loan
Most 401k loans allow you up to five years to repay the debt. If you do not repay the debt in time or you leave your job, you can face some consequences for the unpaid loan. With an unpaid 401k loan, the Internal Revenue Service will charge you a 10 percent early distribution penalty. You will also have to count the money as regular income and pay taxes on it at your normal marginal tax rate.
Luke Arthur has been writing professionally since 2004 on a number of different subjects. In addition to writing informative articles, he published a book, "Modern Day Parables," in 2008. Arthur holds a Bachelor of Science in business from Missouri State University.