Editor’s Note: Federal News Radio and Walker Capital Preservation Group apologize for the error.
Why do we borrow from the Thrift Savings Plan (TSP) instead of the bank?
Well, a personal loan from the bank is going to be dependent on your credit score and will have a much higher interest rate than the TSP would charge you. In general, someone with a good credit score today is going to start around 10.94 percent, according to the Nerdwallet Personal Loan Calculator tool, on an unsecured loan, meaning a loan that doesn’t require collateral.
When borrowing from the TSP, you are borrowing your own money, there is only a $50 fee, it doesn’t impact your credit score, and you only pay interest equivalent to the G Fund’s returns (and you are repaying that interest to yourself). Not too shabby of a deal — but there are still potential pitfalls to be aware of before deciding how to go about obtaining your loan.
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One issue with reaching into your retirement savings is that you sacrifice potential earnings. Your TSP is a long-term investment meant to eventually replace at least one-third of your paycheck for most FERS retirees. That’s an uphill struggle when whatever amount you loan is no longer in the account to grow and compound. But the interest rate that you are assessed on your TSP loan (which equals the G Fund’s return) is actually paid into your account, so if you originally pulled the loaned money from the G Fund then by the time you paid it off you would be “whole.”