Can someone explain "Interest rate on TSP loans"?

[Hybrid93Hatch]

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Hi,

nQQb to this site and must say I will be doing a lot of surfing on it since I am big with investing and watching my account grow

I have been contributing to TSP for over 3 years now.

When you look at the loan page what does this mean:

"The current interest rate is 4.625%"

Is this the rate I must pay back on top of my loan? If so, is that 4.625% put into my TSP account?

Thinking about taking a loan out and wouild like to get this cleared up first.

Thanks for any help with this :^

 

[tsptalk]

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Welcome Hybrid. That is correct. The interesrt rate is what you pay yourself and it all goes back into your account.

Thanks for joining us!
Tom

 

[Sr]

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Hybrid93Hatch wrote:

Thinking about taking a loan out and wouild like to get this cleared up first.

Thanks for any help with this :^

I wouldreconsider taking loan out of TSP because you are repaying the loan with after tax dollars backin to a TSP pot that holds pre tax money. Even if you are paying yourself the interest on the amount you borrowed, this is a bad deal because regardless of your tax bracket, every dollar you pay back in now is already taxed in your paycheck today.When it is time to take this dollar you just paid back, out of the TSPwhen you retire, you will pay tax on it again.

Now why would you want to pay tax onyour hard earneddollar two times?

 

[Hybrid93Hatch]

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Sr wrote:

Hybrid93Hatch wrote:

Thinking about taking a loan out and wouild like to get this cleared up first.

Thanks for any help with this :^

I wouldreconsider taking loan out of TSP because you are repaying the loan with after tax dollars backin to a TSP pot that holds pre tax money. Even if you are paying yourself the interest on the amount you borrowed, this is a bad deal because regardless of your tax bracket, every dollar you pay back in now is already taxed in your paycheck today.When it is time to take this dollar you just paid back, out of the TSPwhen you retire, you will pay tax on it again.

Now why would you want to pay tax onyour hard earneddollar two times?

That makes sense, but I would be saving money on the 5.29% loan because less is owed for the car due to the down payment from theloan.In 27 years I hope to have enough where this 5-7k I borrow won't matter anyhow

 

[retiredcg]

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Hybrid -

I would agree with Sr and his logic. However, there may be some limited occasions where a short (and I mean S-H-O-R-T!) term loan from your TSP wouldn't be all that bad. For instance, if your credit was down in the lower spectrum, and you found it extremely expensive to get a loan approved that you really needed, with the TSP rates as they are - it could be inexpensive. You DO need to be careful, and make the loan for the shortest possible timeframe (not more than a year to payback if possible), so you are not radically affecting your long-term retirement plans. I was able to quickly get hold of enough to assist my daughter with a down-payment on a condo which has appreciated at nearly100% in the last three years. While I'm not looking at "payback", it sure was nice to see that it worked out well. And yes, I was able to pay back the loan in less than a year by making extra payments.And whilemy credit scoreis well into the 700's; I didn't have to go through all the hassle with paperwork and such.

The same thing could be said with an onerous high-rate car loan or even credit card rate which has, for one reason or another, rocketed into stratospheric interest rates. You could be able to save quite a bit of interest by paying off the credit card with a quick TSP loan - and then paying back the TSP loan faster with the added funds from paying off the card.

But remember, the bottom line is you NEED to pay off the TSP loan just as fast as you possibly can. Though the rates are only a little over 4.5%, the longer the funds take to get back into your account, the more your retirement nest egg will be negatively affected. As a hypothetical example - if you use your entire 15,000 TSP to pay cash for a car, and thenjust continue oncontributingto your TSP as you had been - assuming all things being equal - by the time you"cash out" your TSP, you will find that that 15,000 car has cost you nearly 90,000 due to the compounding of interest you lost out on by using your TSP instead of taking a car loan from a reputable institution (credit union or such)at about 4 to 6% APR and paying it off in as short a time as you can.

Good Luck and have a GREAT holiday! :^