Borrowing from Yourself: The Determinants of 401(K) Loan Patterns

33 Pages Posted: 1 Oct 2010

See all articles by Timothy (Jun) Lu

Timothy (Jun) Lu

Peking University HSBC Business School

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Abstract

This paper explores the determinants of people’s decisions to take 401(k) loans. We argue that 401(k) plans do not simply represent retirement saving, but they also provide a means of saving for precautionary purposes. We model factors that rationally would induce people to borrow from their pension plans, and we explain why people do not often use 401(k) loans to replace their more expensive credit card debt. Next we test our hypotheses using a rich dataset and show that people who are liquidity-constrained are more likely to have plan loans, while the better-off take larger loans when they do borrow. Plan characteristics such as the number of loans allowed also influence borrowing and loan size in interesting ways, while loan interest rates have only a small impact.

Suggested Citation

Lu, Timothy (Jun) and Mitchell, Olivia S., Borrowing from Yourself: The Determinants of 401(K) Loan Patterns. Michigan Retirement Research Center Research Paper No. 2010, Available at SSRN: https://ssrn.com/abstract=1684723 or http://dx.doi.org/10.2139/ssrn.1684723

Timothy (Jun) Lu (Contact Author)

Peking University HSBC Business School ( email )

University Town
Nanshan District
Shenzhen, Guang Dong 518055
China

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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