TSP Loan to pay off debt

[mtc1]

I have about $8000 in CC debt at a rate of 16% and a car loan at about $9000 at 4.45%. I checked the current TSP loan rate and it's 1.5%. My TSP account is over 100K and I still have 20 years until I retire, So does it make sense to take a TSP loan out to pay off my current debts?
Thanks!

 

[Show-me]

No, don't ever get in the habit of dipping into your retirement account to pay off revolving debt. I have listened to all the consumer advocates and they all say the same thing. The only time it is acceptable is in order to get a much much better mortgage rate. I said much, much, much, much better rate. See Clark Howard Show.

 

[Show-me]

Welcome to the MB too!

 

[nasa1974]

mtc1, Welcome aboard.

Your idea looks tempting and it isn't that large of an amount. I tend to agree with show-me, though. There are more variables than just the 1.5% interest from TSP. You also have to look at what that $17,000.00 could earn you over the time frame it would take you to pay back the loan. If that money sat in the "G" fund it would earn between 4-6% per year. That would be between $680 and $1020. There have been a few members that have taken a loan against their TSP and they may pop in to help. My suggestion is if you agency offers financial planning I would talk to someone about what you want to do. They should look at all the variables and let you know if it is worth it or not. Good luck.

 

[Sensei]

The auto loan doesn't sound too atypical. My credit union offers refinancing on auto loans at a rate as low as 1.99%
https://www.penfed.org/
Maybe you could look into something like that in your area. I doubt lowering the interest rate 2% on a balance of $9K will significantly lower your overall debt after paying fees, but it's worth a look.

You need to do something about the credit card debt though. 16% interest is rough if you're making payments. Maybe another credit company is offering a low interest transfer deal?

 

[dannyboy]

Hello and Welcome to the board (MB),
I have done that, take a (quickee loan?) at a rate (1.75%?), that was sent by God?
The amount of interest you may be missing out on may not be much, but it will set you up to start a habit?
That could send you back over and over for petty reasons?, It did with me.
Even if you are super-vigilant about your control, your balance just will not make the gains it used to?
The market are set to blast off, which they are, you are going to miss out.
it is just like the others have mentioned, Only take out A loan is if you are making a house, property, etc. purchase? Even then explore all the other LEGAL ways, you can do it without using any TSP?
db

 

[sillbeer]

I agree with what has been said. I took a loan out for $8k a couple years ago and wish I hadn't. I still have at least 23 years till retirement. I will not make that mistake again. People I work with are always dipping into their TSP and I picked up on it thinking it's a good idea.

- Destin

 

[Boghie]

MTC,

DinkyTown offers some exceptional financial calculators that can help in this decision. The one of immediate interest is the 'Credit Card Payoff' calculator. Using that calculator you can pay off this pig of a credit card bill in two years if you pay $400/month toward it and stop using the card. I would recommend dropping your TSP contribution (if necessary) if the $400/month (not pay period) will be impossible. $600/month kills it in 18 months. Reducing your TSP contributions to 5% is kinda a no-brainer if you have 16% interest rates to pay off, reducing it further is more complicated since you are biting into the 100% instant match growth.

My guess is that you will receive offers for reduced interest rates as soon as you show a big payoff history! They will want to keep you. Don't fall for the trap of bonus points and paybacks - take a lower interest rate.

Don't worry about the car till the credit card is paid off. It is a decent fixed rate. Credit cards are fixed rate in name only. Think positive. If you stop charging on the card you will have no credit card debt in two years and your car loan will have two less years on it. You can apply all/some of the credit card payment toward the card and kill that thing off as well.

And, no, I strongly suggest you DO NOT use a TSP loan for this. Read and listen to Dave Ramsey. You've probably got to get mentally ready and serious about debt management. I lived the dream. I am almost out of debt now - and my situation was far worse. Had I taken a TSP loan four years ago I would probably still have credit card debt to go along with the TSP loan payback. Ugly.

Finally, you have 20 years till retirement (so about 45 years old) and a $100K. If you invest $8K/year (your contributions and the match together) for the next 20 years and increase that contribution by inflation then you will have $930K upon retirement. You will we able to take out about $38K/year pre-tax for twenty years (till 85 - then you are broke). That is $3,100/month or $1,450/pp.

Again, do not assume you are retirement rich and take out 1/5th of your retirement assets to pay off current debts. You will lose the growth on that money, you will refill that bucket with after-tax money, and you will pay interest on that after-tax money. And, this is from a guy who just took a TSP loan to help buy new windows for the house. But, I can pay it off within two years and the amout was only about 3% of my holdings.

Happy hunting.

And, like all hunters, look at your less calorie consuming options:cheesy: