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If you’re in debt, you’re not alone. Experian reports that the average U.S. consumer pays $1,237 in monthly debt across their various obligations (1).
Meanwhile, median weekly earnings for American workers were $1,196 during the second quarter of 2025, per the U.S. Bureau of Labor Statistics (2). That’s an annual salary of $62,192, assuming 52 weeks of work. And when we divide that by 12, it’s a monthly income of about $5,183.
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This means the typical American could be spending about a quarter of their monthly income on debt payments alone. But while digging yourself out of debt may be hard when you earn a typical wage, the task should be a lot easier when you have a large salary.
That’s why Dave Ramsey was appalled when a caller with a six-figure career recently asked if he should take out a 401(k) loan to pay off his roughly $33,000 in debt (3).
A plan with a flaw
Dave, from New York, explained that his household income is $205,000. Ramsey felt that he was making more than enough to rid himself of debt in under a year, given the relatively small amount owed.
"Dude, why don’t you just get on a budget?" Ramsey said. "Clean this mess up. Quit trying to find a hack."
After all, the first step to paying down debt is to develop a strategy grounded in pinching pennies to pay things off.
Generally speaking, there are two ways to do this: the avalanche method and the snowball method. The avalanche focuses on paying down the biggest debt first, then knocking off the smaller ones. Meanwhile, the snowball technique aims to build momentum by paying off smaller debts one after the other.
But when dealing with debt, the first step is figuring out how much you can contribute towards your principal plus interest each month.
Fortunately, figuring out a budget can be easier than ever with Rocket Money.
The app tracks and categorizes your expenses, providing a clear view of your cash, credit and investments in one place. It can even uncover forgotten subscriptions, helping you cut unnecessary costs and save potentially hundreds annually. This could fee up money to help pay down debts like Dave’s.
For a small fee, the app can also negotiate lower rates on your monthly bills, making it a valuable tool for keeping your finances on track.
After getting on a budget, Dave’s priority should be to pay off his debt as soon as possible. As he explained to Ramsey, his debt comes from a variety of sources. He owes:
- $13,323 in back federal taxes
- $13,250 on one credit card
- $4,909 in a car loan
- $1,138 on another credit card
Dave’s logic was that since he could borrow from his 401(k) at an interest rate of 5%, it made sense to do that, as opposed to paying a higher interest rate on his remaining debts. His higher credit card balance had a roughly 27.8% APR, well above the average rate of 22.83% from the latest Federal Reserve consumer credit report (4).
But Ramsey was vehemently opposed to Dave borrowing more money to pay off debt, given his income.
“If you want to work a different plan, you called the wrong place because we’re going to get you out of debt so that you can build wealth so that you can change your family tree and be outrageously generous.”
He told Dave to spend the next 12 months paying only for essentials, and to put the rest of his paycheck toward debt. He even suggested that Dave stop saving and investing until he’s debt-free — a very different course than borrowing from retirement savings.
If you find yourself in a similar situation, sky-high interest rates on credit card balances could be eating into your savings. With average APRs now topping 20%, consolidating your debt with a personal loan at a lower rate could help you pay it off faster.
That’s where Credible comes in. The platform lets you compare personal loan offers from trusted lenders — like Discover, Upstart, and SoFi — for free.
Once you answer a few questions about your current debt and annual income, you can view offers starting at just 6.49% APR. Since Credible only does a soft credit check, your score stays untouched while you shop around.
You might also look into refinancing your car loan to trim your monthly payments. Thanks to the Fed’s recent rate cuts, refinancing could free up extra cash every month. In fact, a recent survey conducted by LendingTree found that those who shopped around for car loan rates and chose the lowest one saved an average of $2,346.
You can compare auto loan refinance rates offered by lenders near you for free through LendingTree.
Here’s how it works: Just answer a few simple questions about yourself and the vehicle you drive — and LendingTree will connect you with two to five lenders from their network of more than 300 lenders. Because insurance inquiries don’t require a hard credit pull, browsing offers on LendingTree won’t impact your credit score — guaranteed.
You may be eligible for refinance loans starting at 3.50% APR through LendingTree’s network.
Car ownership isn’t just about loan payments — insurance is a big expense too.
Insurance premiums have jumped 55% since 2020, and shopping around could save you big. According to a LendingTree survey (5) of roughly 2,000 American consumers, 92% saved money when they switched their auto insurance providers.
You can compare auto insurance rates from reputable lenders — like Progressive, Allstate, and GEICO through OfficialCarInsurance.com.
All you have to do is answer some basic questions about yourself, your driving history, and the type of vehicle you wish to insure, and OfficialCarInsurance will sort through its database and show rates starting at just $29 per month.
The pros and cons of a 401(k) loan
Dave’s idea to borrow from his 401(k) wasn’t great for his situation, according to Ramsey.
But, what if you have a lot of debt and don’t make nearly as much? It may not be feasible for you to pay off all of your debt simply by cutting back and spending more carefully. So, you may find yourself contemplating a 401(k) loan if it allows you to settle your debt at a lower interest rate.
It could be a good idea in theory. Not only can you lower the interest rate on your debt, you can also be paying yourself that interest, since it’s your money. However, there are some risks associated with a 401(k) loan that you need to know about.
First, while the interest rate may be affordable, the sum you’ve borrowed is money that will no longer be invested. Worse yet, if you’re unable to pay back your 401(k) loan, there could be big consequences.
You might think you have plenty of time to repay your 401(k) loan, the typical period is five years, but there is a catch: As Fidelity points out (6), if you leave your employer — whether because you get a new job or you get laid off — you would end up having to repay your loan in full in a short time frame.
If you don’t pay your balance in time, it’s generally treated as a withdrawal, which could leave you subject to taxes. And if you’re not yet 59½, you’ll face a 10% early withdrawal penalty on top of that.
Not only that, you’ll also lose out on the growth you would have otherwise gotten on that money.
Let’s say your 401(k)’s annual return is 7%, a bit below the stock market’s average, and you take a $12,000 loan from your 401(k) that you intend to repay, but don’t manage to do so.
If you take that loan at age 45 and retire at age 65, it could mean retiring with about $46,400 less. The extra $34,400 is foregone gains on the $12,000.
At the end of 2024, 13% of 401(k) plan participants had an outstanding loan against their balance, reports Vanguard (7), with the average loan amount being $11,067. So, while it’s clear that 401(k) loans are not uncommon, that doesn’t make them the right choice.
Of course, that doesn’t mean a 401(k) loan is the wrong choice for you. If your job is very stable and you have no plans to leave it, and borrowing from your 401(k) is your cheapest option for paying off debt consolidation by far, then it could make sense.
It could also make sense to take out a 401(k) loan for an emergency expense if you don’t have enough regular savings to pay for it. But you may want to talk it over with a financial advisor first, as they may be able to suggest other methods of debt consolidation that leave your savings intact.
If you are going to borrow from your 401(k), make sure you understand the rules, including your repayment period and what happens if you end up leaving your job. It’s important to go in with all of the right information so there are no surprises down the road.
Read more: Warren Buffett used 8 simple money rules to turn $9,800 into a stunning $150B — start using them today to get rich (and then stay rich)
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Experian (1); Bureau of Labor Statistics (2); @The Ramsey Show Highlights (3); The Federal Reserve (4); LendingTree (5); Fidelity (6); Vanguard (7)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.