Payday loans, cash advance loans, and short-term installment loans

Payday loans, cash advance loans, and short-term installment loans

Cashing out your 401k

If you’ve left the employer where you started your 401k plan, you may need to decide what to do with the money you have saved. Since you don’t have a new job with a new 401k plan, you can’t roll it into a new plan until you get a new job. You can roll it into an IRA or if you have over $5,000 saved in the plan, then you’re permitted to leave it where it is and continue to let the money grow.

The last option is to cash it out entirely. You close the account and they send you a check for the money you had in it, minus the 10% early withdrawal penalty if you’re under age 59. This may sound like a good idea when you’re unemployed, but it can really set you back on achieving your retirement goals. Also, keep in mind that the money you receive will be treated as taxable income by the IRS. In other words, you’ll pay income taxes on those funds next April.

401k loans

When you’re employed, many employers allow employees to take out 401k loans. This is where you borrow against the money you have available in your 401k. However, those loans are extended at the employer’s discretion and it’s rare that an employer allows 401k loans by former employees. In fact, many employers will require an employee to immediately pay back the loan if they are no longer employed with that company.

Early distributions from an IRA

Another retirement option is to take early distributions from an IRA. You may consider this if you roll your former employer’s 401k into an IRA or you might already have an IRA open to support your retirement goals.

In either case, you will face tax penalties on the money you take out of your IRA. Again, the IRS will treat the money you receive as taxable income. That could lead to a tax bill next April, even if you get a new job before that.

Another solution you may be considering during a period of hardship is any no-credit-check loans. These are loans that tout the advantages of getting cash in your account within 24 hours, no credit check required. This can sound great. You don’t have the income to qualify for any traditional loans, so you turn to the alternative financing solutions (AFS) to get the cash you need.

However, just because you can use AFS to get the cash you need, it doesn’t mean that you should. These types of financing solutions come with two huge problems:

  1. Extremely high interest and financing charges
  2. Automatic ACH payments that can drain your bank account

Finance charges

It’s not uncommon for these types of loans to have interest rates over 200% or even 400%. You can also expect to pay about $30 for every $100 you finance. These loans have excessively high costs and if you don’t have a job to pay the loan back within the first two weeks of taking it out, those costs will stack up quickly.

ACH direct debit

The other issue is the ACH direct debit that most of these loan systems use for payment. They connect to your bank account to direct deposit the funds you receive, then they direct debit the payments from the same account. This can create issues with your bank account. ACH payments can be hard to stop and most AFS lenders make it extremely difficult, if not impossible, to stop those payments. They’ll drain your bank account and stack up NSF and overdraft fees.