Borrowing from tomorrow for today’s unexpected – What to know before you take a TSP Loan
What’s the true cost? It’s more than just the fees
Like many other loans, a TSP Loan has an origination fee ($50) up front and an interest rate that is part of the payment you make each month. The interest rate of your loan would be the ‘G’ Fund’s interest rate from the month before. What’s unique about the interest on a TSP Loan is you’re paying yourself with that interest as it’s going into your TSP account, not the government’s.
While you are paying yourself the interest on your TSP loan remember the balance of your loan is not in the TSP during repayment. Every month that money is out of the TSP it’s missing out on the growth of those TSP funds. If the growth in a given month is greater than the interest you’re paying yourself, you’ve missed out. With the way compounding works, a few missed months in a row can make a big impact long term.
Will your payment change your contributions?
When you are making payments on a TSP Loan, those payments are done separately from your normal contribution. Meaning if you’re contributing 5 percent to get the maximum TSP match each pay, you’ll have that 5% plus the TSP Loan payment taken out. For many this can be too large of a deduction each pay.
If that’s the case, you can’t change the amount you’re paying on the TSP Loan, so you are left lowering your contribution. Lowering that contribution can not only cost you missed growth, but if you go below 5% contribution, you’ll miss out on some government match as well. Just like with the real cost of borrowing discussed above, the growth missed by lower contributions can make a substantial impact on your future balances.
Long story short, TSP Loans can be a great tool in your federal employee toolbox. Just remember a TSP Loan is less ‘Trip to the ATM’ and more a ‘Break in Case of Emergency’ option. Once it’s out, it can be difficult to catch back up.