Dear Chuck,

My home’s air conditioner went out. We’re getting by with some fans but need to replace the unit soon. Should I use a low interest rate credit card or borrow from my 401(k)?

Hot in Texas 

Dear Hot in Texas, 

Having grown up in Texas myself, I understand this is a need and not simply a want! The summers can get dangerously hot. 

Our unit has gone out several times over the years, so I know it can be expensive to fix or replace it. 

Before you make a final decision, consider paying for a repair that will keep it running long enough to postpone having to borrow money to replace it. We have a unit right now that simply leaks coolant so we have it refilled until that option is no longer working. We’ve been able to keep it running for a couple years but know the day is coming when it will have to be replaced. 

If you know for sure it has to be replaced, be a wise consumer. There are lots of options and costs can vary dramatically for the equipment and labor. Do your homework. Check out any deals from big-box stores like Costco, Sam’s or Home Depot before selecting the replacement unit or repairman. 

Financing Options 

401(k)

Withdrawing funds from a 401(k) before you are 59 ½ will cost you a 10% penalty. Plus, you will have to pay taxes on the money you withdraw.

If you can prove that your income was negatively impacted by the COVID-19 pandemic, you may qualify for a hardship distribution under the CARES Act. You can withdraw up to $100,000 without the penalty and the IRS will grant you three years to pay taxes on the money you withdraw. The taxes, however, can be avoided if you repay the account within three years.

Problems with borrowing from your 401(k):

• You should not presume upon the future.
• Will the income impact your overall tax rate? Will it disqualify you from other benefits?
• What effect will this have on your retirement plan?
• How comfortable are you with filling out paperwork and dealing with the government?

This is the last option I recommend that you choose. Before you borrow from your retirement account, consider ceasing or decreasing your 401(k) deposits until you pay for the new air conditioner.

Low Interest Rate Credit Card

A credit card is a good option for those who pay off the balance each month. See if you qualify for a 0% promotional offer. The problem for many is the temptation to use it for things other than needs. Your credit score can temporarily drop a few points when you apply for any type of credit, but timely payments will protect it.

Considerations:

• Do you have credit card debt? 
• What rate are you paying? Do you have a pay-off plan? 
• Can you transfer the balance to a low-interest card? 
• Could you pay for air conditioning with that card and pay it off quickly?  

Personal Loan

A personal loan provides a lump sum of money that is paid back with monthly set payments. This is a good option if you qualify for a low rate and need to finance one large expense. Compare online rates and options with local banks or credit unions. Make sure you know all fees and compare this with the cost of a credit card. It is possible to pre-qualify in minutes.

Payback Plan

Sell items you do not need. Take on a part-time job and apply that income to the debt.

Be Creative 

If these options do not work well for you, consider a private loan or help from your church. There may be people you know that would gladly loan you the money interest-free right now. This is also a circumstance where the benevolence ministry at your church may want to make the loan to you. 

No air conditioning in the heat of summer is miserable. Here are some ways to stay cool while waiting to make your decision. They can also help you save money once the new system is installed. A high-efficiency unit can reduce your energy consumption and monthly bills. So again, do your research and hire a reputable company for installation.

When money is set aside in an emergency account, you can cover repairs and maintenance without fear or worry. God does not prohibit using credit, but He gives clear guidelines for using it wisely. There are three basic principles God’s people should remember:

• Credit should never be normal
• Credit should never be long-term
• Never take credit without a certain way to pay it back

I hope this will help you get the A/C on again soon and avoid financial hardships down the road as well. 

This article was originally published on The Christian Post, June 12, 2020.