11 Pros and Cons of a TSP Loan
Thrift Savings Plans or TSP are designed to help federal employees and the military to have some of the same benefits the private sector gets in a 401 (k) plan, but they can borrow money from their plan. You may wonder about the pros and cons of lending against a TSP and whether it is a good idea.
This article will look specifically at those pros and cons to help you know the advantages or disadvantages of getting a TSP loan.
Pro: Low-Interest Rate
A TSP loan has the advantage of having a low interest rate compared to many other types of loans. The interest rate is generally less than two percent. Most other personal loans available as personal loans typically have an interest rate of 2.49% to 35.99%.
|Lender||Rate||Maximum Loan Amount|
|Marcus by Goldman Sacs||6.99-19.99%||$40,000|
These examples are from Bankrate at Best Personal Loan Rates for July 2021 | Bankrate.
The current TSP loan rate is 1.50%, which is the current rate on a G Fund, which is generally the interest rate based on the TSP loan.
Pro: Loan Amounts
You can typically borrow any amount between $1000 and $50,000 if you have enough in your account to cover it. A $10,000 TSP loan at 1.50% over five years would have payments of $173.10 per month with a total interest paid back of $385.93.
The same $10,000 loan borrowed from a different lender with a rate of %.99% would have payments of $193.28 per month. This amount is only about a $20 difference.
The same loan over five years from a lender at the higher interest rate of 35.99% would have payments of $361.27.
You can go to a loan calculator at this website and enter the terms, and it will tell you the amount your payment will be: Loan Calculator (calculatorsoup.com). You can also access a loan calculator at the TSP loan website at https://tsp.gov.
Pro: Payments by Payroll Deduction
Another advantage of a TSP loan is that you can have the payment conveniently set up to be taken out of your paycheck each pay period.
Though, you can set up payments to be taken straight out of your bank account at most lenders or set up a monthly automatic online payment paid each month.
Pro: No Penalty for Early Repayment
There are a couple of advantages to paying an additional payment on your loan. One, you can pay it off early and no longer have to worry about the loan. Second, you can re-amortize the lower balance and lower your monthly payments.
Pro: No Credit Check
An advantage of a TSP loan is that there are no credit checks. You qualify as long as you meet the following requirements:
- Have at least $1000 in your account.
- You do not have any court orders against you.
- You are in “active pay “status.
- It’s been at least 60 days from when you paid off your last TSP loan.
- You are still currently employed by the federal government.
- At least 12 months have passed from when you last took a taxable distribution from your TSP account.
You do not have to provide a lot of paperwork, proof of income, and other information like you would other lenders.
Con: Application Fee
A disadvantage over many other loans is that they charge a $50 application processing fee directly out of your loan funds when you get your loan funds. Many other lenders do not charge a processing fee for taking your application for a loan.
Con: 90-Day Repayment if Your Leave Your Job
Possibly one of the worst disadvantages of getting a TSP loan is if you leave your federal service job before paying off the loan in full, you have only 90 days to repay the loan if you cannot do so or fail to meet the deadline the entire loan is reported to the IRS as income.
This 90-day repayment could cause a hardship if you had to move or relocate and take too long to find a new position.
Con: Short Loan Terms
Typically, another disadvantage of getting a TSP loan is that the term lengths are usually 15 years or less to repay them. On larger loans of say $50,000, this can make the payments relatively high and take a big chunk out of your monthly budget to live.
Con: Missed Earnings
When using a TSP loan, you borrow against your future and cut back your investment growth for retirement. This loss may not seem like a big deal while you are young and still working, but it could be devastating when you retire if you cannot afford to pay all your bills.
Con: Loan Limits
If you plan on using the funds to purchase a home, you will be very limited in the amount you can spend since the maximum you can borrow on a TSP loan is $50,000 and then only if you have that amount available in your account.
It may, however, cover your closing costs and a down payment on some homes. The median home price in the United States is over $350,000, so you will need a second loan or considerable savings to purchase any decent home for your family in most cases.
Con: A TSP Loan Does Not Build Credit
Unlike most loans, a TSP loan does not help build your credit rating. Your payments are not reported to any credit bureau. If you need to build credit, this might be worth giving consideration.
There are both pros and cons to consider before taking out a TSP loan. You need to carefully consider both and then decide based on what you believe you think is best for your situation. Factors like job stability and age are crucial things to consider since repayment is swift if you leave your federal job.