Consolidation Loan, Part Six
The terms of 401 (k) loans vary widely among companies that offer them, so be sure you understand all the conditions of the loan before you borrow. Then treat this loan as seriously as any otherafter all, this is your retirement security you are borrowing against.
Loans from Relatives
Borrowing money from relatives can be a wonderful solution to your problemor a disaster. You can often borrow money from a relative at an interest rate that’s far lower than what you can get from a bank. The interest rate you offer to pay your relative on the loan will typically be higher than she could earn by parking her money in a bank account or conservative investment, so she will benefit as well. Best of all, you don’t have to pass any credit checks.
If you and a relative do decide to strike a deal, be certain she understands your financial situation. You should be up front about your debt load and, if possible, sign a contract agreeing not only to the terms of the loan, but also to rid yourself of all other debt until the loan is paid. Be businesslike about the loan. If you are not, you are likely to fall into the trap of not taking the obligation seriously and might be tempted to continue to take out other cards and continue to buy on credit.
If your relative generously decides to cancel the loan later, be careful. The IRS considers “forgiveness of a debt” taxable income, and you may have to pay taxes on that amount. Be sure to talk to an accountant.
Brokerage (Margin) Loans
If you hold stocks or bonds, you can borrow against them and use the money either to buy more securities, or for any purpose you choose. Interest rates on margin loans are usually a couple of points above the prime rate. For stocks, you can borrow as much as 50 percent of the market value of the security. That percentage is mandated by law, so if the value of your securities drop, your broker will demand repayment of any amount that would put you over the 50 percent limit.
Say, for example, you have stock worth $10,000 and you borrow against 50 percent of its value, or $5,000. If the value of your stock drops to $2,000, you will have to pay back $4,000 immediately, since $1,000 is the most you can borrow against $2,000 worth of stock. Margin loans are tricky and should really be used only by experienced investors.