Banks don’t want to lend money for questionable assets (e.g. overpriced homes) so an alternative form of collateral needs to be coughed up and the only thing I can think of as an alternative form of collateral are 401k’s, IRA’s and pensions.

People should be allowed to borrow from their 401k’s and IRA’s penalty free but should pay their accounts bank with interest.  I’m really not sure why such transactions are prohibited anyway, if a person defaults they are technically defaulting against their own money so it makes sense.

I know some PF Bloggers will call this idea “crazy” and that retirement funds should be used for retirement but it makes no sense for people to be losing their homes, pulling kids from college, going hungry just so they’ll have some cash in retirement.    To date, my sister in law, my brother and dozens of co-workers have been terminated.   While I’m ok financially, I know many others are not and most of these people are simply cashing out their 401k’s anyway and paying hefty penalties.   A great alternative would be to allow these guys to borrow from these funds at a low rate and allow them to pay it back (forced saving) when they get back on their feet.

Personally, I’d love to borrow 50k from my retirement account at 12% interest and pay it back over time.  I’d be earning myself a solid 12% return and I would buy a second home with the funds.   It’s a win-win all the way around no?