As the old cliché goes, “If it sounds too good to be true, it probably is”. One of the biggest money blunders a working investor will make is to use his 401(k) as a debt consolidation loan. Though it sounds financially sound, it actually has a few significant drawbacks. So significant, it could cost far more than seeking other alternatives.

The pros of using a 401(k) loan for debt consolidation are you are borrowing your own money. Moreover, while you pay interest on the loan, you pay the interest back to yourself. And lastly, it doesn’t require a credit check to obtain a 401(k) loan for debt consolidation.

But what are the cons?

* You lose your job. The worst possible circumstance is you are separated from your employer after taking out the 401(k) loan. If this occurs, the loan becomes due in full. In the instance the balance cannot be paid-off, tax obligations and fees will apply.

* You lose those investment dollars. Rather than those dollars gaining interest on a tax deferred basis, they are tied-up elsewhere.

* The interest rate you “pay yourself” might actually be higher than getting a consolidation loan from a third party. While it is true 401(k) loans are easy to obtain, the interest rate is usually the prime rate plus 1 or 2 percent.

Good debt advice is difficult to come by because investing and money management are such complicated issues. Before seeking a 401(k) loan, consult a professional.