Alright, help me break down this 401k loan concept.
Let's start with the same starting assumptions:
$40,000 loan, 60 month term. You have the cash, you can take out a 2% loan through the dealer, or you can take out a 401k loan.
For the sake of keeping it simple, let's assume you can get a 7% return on any money saved.
Option 1: Take out a 401k loan. I just checked mine and it has a 6.75% interest rate and I cannot make contributions with an outstanding loan. So that's a $787 monthly payment. Plus a bunch of nickle and dime fees that we'll ignore. So $787 "saved" per month, always earning 7% interest, and making no other contributions to my 401k, it would have a balance of $56,000 in 5 years.
Option 2: simply pay cash. My 401k balance would go from $40,000 and with zero other contributions during the next 5 years it will have a balance of $56,100. If I saved that $787 "payment" into my 401k, then my 401k balance would be $112,000.
Option 3: Put that $40,000 into a brokerage account. Make a monthly withdrawal each month to make the car payment. I would have $6,190 left in that account when the final payment is made. (this calculation was made previously in this tread). 401k balance is the same as above and have an ending balance of $56,100, or $112,000 if I made I saved that payment each month.
Am I looking at that correct?
(edit.... I guess in theory, you still have that $40,000 cash laying around in option 1 that you could invest)