If your retirement account is a 401(k), you may be able to get a loan from your account. See the IRS documents 401(k) Resource Guide - Plan Participants - General Distribution Rules and Participant Loans in 401(k) Plans for details. Your 401(k) administrator will help you with the necessary forms if your plan allows loans.
Payday Loans = Very Bad
Avoid at all costs the store fronts that blight lower-income neighborhoods offering payday loans, signature loans, and title loans. The interest rates these operations offer are extremely high, and according to many Bills.com readers, the collections practices are aggressive and illegal under federal law. If you do borrow money from one of these operations, take your time to understand the terms and conditions of the loan completely, and do not sign any contract you do not understand.
You have alternatives to payday and related lenders. According to the Federal Trade Commission document Payday Loans Equal Very Costly Cash: Consumers Urged to Consider the Alternatives, consumers have six alternatives to high-priced loans:
- Consider a small loan from your credit union or a small loan company. Some banks may offer short-term loans for small amounts at competitive rates. A local community-based organization may make small business loans to people. A cash advance on a credit card also may be possible, but it may have a higher interest rate than other sources of funds: find out the terms before you decide. In any case, shop first and compare all available offers.
- Shop for the credit offer with the lowest cost. Compare the APR and the finance charge, which includes loan fees, interest and other credit costs. You are looking for the lowest APR. Military personnel have special protections against super-high fees or rates, and all consumers in some states and the District of Columbia have some protections dealing with limits on rates. Even with these protections, payday loans can be expensive, particularly if you roll-over the loan and are responsible for paying additional fees. Other credit offers may come with lower rates and costs.
- Contact your creditors or loan servicer as quickly as possible if you are having trouble with your payments, and ask for more time. Many may be willing to work with consumers who they believe are acting in good faith. They may offer an extension on your bills; make sure to find out what the charges would be for that service — a late charge, an additional finance charge, or a higher interest rate.
- Contact your local consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget. Non-profit groups in every state offer credit guidance to consumers for no or low cost. You may want to check with your employer, credit union, or housing authority for no- or low-cost credit counseling programs, too.
- Make a realistic budget, including your monthly and daily expenditures, and plan, plan, plan. Try to avoid unnecessary purchases: the costs of small, every-day items like a cup of coffee add up. At the same time, try to build some savings: small deposits do help. A savings plan — however modest — can help you avoid borrowing for emergencies. Saving the fee on a $300 payday loan for six months, for example, can help you create a buffer against financial emergencies.
- Find out if you have — or if your bank will offer you — overdraft protection on your checking account. If you are using most or all the funds in your account regularly and you make a mistake in your account records, overdraft protection can help protect you from further credit problems. Find out the terms of the overdraft protection available to you — both what it costs and what it covers. Some banks offer “bounce protection,” which may cover individual overdrafts from checks or electronic withdrawals, generally for a fee. It can be costly, and may not guarantee that the bank automatically will pay the overdraft.
See the Bills.com resource Peer-to-Peer Loan to learn if you qualify for a loan from a bank alternative.
You mentioned using your retirement account a collateral. Although it is true your retirement account is an asset, retirement accounts are not seen as collateral generally speaking. There are two reasons for this. First, I have not seen a retirement account used as security for a loan. That is not to say that no retirement account has ever been used to secure a loan, I am saying it is not common practice. Second, retirement accounts are exempt in bankruptcy proceedings, generally speaking, which makes them poor candidates to secure a loan.
I hope this information helps you Find. Learn & Save.