401(k) Loan Default Rates: Statistics and Trends

As the U.S. economy fails to rebound to pre-recession levels, more and more Americans are taking out 401(k) loans, especially those who lost their jobs due to the financial crisis and have had difficulty finding new employment. These 401(k) loans are being used simply as a means to pay for necessities. A new study is finding that more and more Americans are defaulting on their 401(k) loans.

Brookings Institution and Navigant Economics released a study that found that Americans are defaulting $37.0 billion a year on loans taken from their 401(k)s. CNN Money, July 17, 2012. In 2008, the default rate on 401(k) loans was 9.7%. Since 2008, the default rate has almost double. In 2010, the 401(k) loan default rate peaked at 19.8% . Currently, thus far in 2012, the 401(k) default rate is 17.4%.

Americans who cannot obtain a traditional loan are taking out loans against their 401(k)s to pay for ordinary and necessary expenses just to get by. The researchers obviously found that the high default rate is due to substantial job losses. With more Americans losing their jobs, they have no ability to pay back their 401(k) loans and are left with no alternative than to default on their loans. Before borrowing from your 401(k), be sure to analyze the advantages and disadvantages. In fact, we would would not recommend borrowing against your 401k.

The study also found that the amount of 401(k) loans that are being taken out is increasing. The study found that a whopping 18.5% of all American who have a 401(k) took out a loan against it. That is a staggering number. Equally striking is that the “true” unemployment number is likely around that same 18.5% figure.

While the 401(k) was meant to act as a cornerstone of retirement, now it’s being used by individuals in their 40s and 50s to simply get by meeting day-to-day expenses. This is a travesty since those in their 40s and 50s are in their prime earning years and its during this time period where most save up for their retirement instead of spending their retirement. If the unemployment rate does not come down soon, how will these individuals who are depleting their 401ks going to be able to retire comfortably?

The alternative to taking out a loan is simply by taking a 401k hardship withdrawal, if the requirements are met. Learn more to see if you qualify for a 401k hardship withdrawal.

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