- Carry on with current 401k contribution and loan repayment ($550 to 401k, $396 to loan).
- Stop 401k contributions and focus on loan ($906 to loan).
- Take out a 401k loan to pay off the loan immediately, then repay 401k loan. ($906 to 401k loan).
A 401k loan has an interest rate (~5% today), but that loan interest gets paid back into your 401k account. The down-side of a 401k loan is that you miss out on potential gains by reducing your 401k balance. There's also a small amount of double-taxation on the interest you pay yourself, since it's paid with after-tax dollars, for example if you get a $7,050 401k loan at 5% and are in the 20% income tax bracket, paying back your full $906/month you'd pay ~$26 in extra tax over the course of your 401k loan, not a huge amount, but worth noting. Also, if you leave your current company before repayment is finished, you have a limited amount of time to finish repayment in full, or the outstanding balance of the loan gets treated as a distribution subject to the 10% early withdrawal penalty.
With a 401k loan you save on paying your loan interest from day 1, and you start rebuilding your 401k balance with your first payment. A 401k loan is most attractive when it's short term and it enables you to avoid paying a high interest rate.
I looked at all 3 options above using a range of 401k return rates (0-20%).
Assuming that in each scenario the full amount goes to your 401k after loan repayment is done. The result is that a 401k loan beats the others unless your 401k returns at above 9%, at which point it is better to just keep on with current payments. The difference between the options is pretty insignificant if your 401k returns near 9%, even if it dipped to 0% you'd only save ~$240 by going with a 401k loan.
I wouldn't count on a 401k sustaining > 9% growth, and because reduced debt gives you increased flexibility and may help you avoid future debt, paying off the loan early seems best. While a 401k loan could come out ahead of just putting $906 to your loan each month, it wouldn't save you that much money even in the worst case scenario, and would cost you a little bit if 401k returns stay high. I would be tempted to borrow from my 401k because I'm curious to find out how easy the process is, but if I thought there was a chance my employment situation would change in the near future, I'd avoid the 401k loan, temporarily stop contributing and pay the debt down quickly.
Here's a good article on 401k loans: Sometimes It Pays to Borrow from Your 401(k)