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A 401(k) loan allows you to access the money you’ve set aside for retirement in your 401(k) account. The interest payments you’ll make while paying back the loan will go into your 401(k) account. Typically, you have five years to pay back the loan.
However, a loan from your 401(k) may affect your overall retirement savings, particularly if you change your employment. Here’s what to know.
- 401(k) loan rules
- Is it a good idea to borrow from your 401(k)?
- 401(k) loans: Pros and cons
- 401(k) loans vs. personal loans
- Other alternatives to a 401(k) loan
- Compare multiple options before borrowing
401(k) loan rules
Though the exact steps may vary by employer plan, here is generally how you’ll take out a loan from your 401(k):
- Determine how much you want to borrow. In most cases, you can’t borrow more than 50% of your vested account balance or $50,000, whichever is less. However, this 50% rule is waived for account holders with a vested account balance of $10,000 or less — in this case, you can borrow up to $10,000.
- Contact your 401(k) provider. Depending on your plan, you may be able to log into your account online and head to the relevant section where you can request a loan.
- Understand your repayment terms and interest rate. Before agreeing to the loan, check to see what interest rate you’ll receive and figure out if you’re able to pay back your loan within five years. Ask your 401(k) provider to show you what your payroll deductions will be to pay back your loan.
- Complete the application and wait for your loan funds. Fill out any required paperwork to finalize your loan. Then the funds should arrive with your next paycheck.
Is it a good idea to borrow from your 401(k)?
Borrowing from your 401(k) may make sense if you need funding for larger expenses, such as home repairs, that can reasonably be repaid within five years.
However, you may want to consider alternatives if you’re looking to borrow small amounts and for expenses that aren’t deemed necessary. For instance, if you want to take a family vacation, a 401(k) loan may not be the best tactic. Budgeting and saving would be a far better option.
You might also avoid a 401(k) loan if you don’t believe you’ll stay with your employer for the foreseeable future, as we discuss in the pros and cons section below.
Finally, before taking out a 401(k) loan, consider what interest rates you may qualify for when it comes to alternatives like personal loans. If those options offer lower rates, you may want to go in that direction.
401(k) loans: Pros and cons
A loan from your 401(k) isn’t the right choice for everyone. Consider a few of the benefits and drawbacks:
Pros
- No credit check: Since you’re borrowing money from yourself, you won’t have to undergo a credit check to get a 401(k) loan.
- Lower interest rate: You might get a lower 401(k) loan interest rate compared to a personal loan.
- Accessible funding: Generally, you could receive funds within several days with a 401(k) loan.
- Flexible repayment options: Though most 401(k) loans require you to pay your loan back in five years, you can generally pay it back faster with no prepayment penalty. You can even choose to pay it back automatically using payroll deductions.
- Benefits to retirement savings: The interest you pay for your 401(k) loan will go back into your account. Plus, if the interest you pay is more than what you may have lost in investment earnings during your loan period, you won’t be behind on your retirement savings.
Cons
- No opportunity to build credit: A 401(k) loan isn’t reported to the credit bureaus, which means it doesn’t positively (or negatively) affect your credit.
- Loss of investment gains: The biggest issue with a 401(k) loan is that you’ll likely lose overall investment gains by taking money out of the account. Additionally, because 401(k) loans have low interest rates, you might not pay enough interest to make up for these lost gains.
- Limited loan amounts: You can only borrow up to 50% of your vested balance or $50,000, whichever is less. This might not be enough to cover your expenses.
- Employment requirements: You have to remain employed with the sponsoring employer until the loan is paid back. If you’re laid off or change jobs before paying off the loan, you’ll have to pay the entire loan back the following year or face taxes and penalties.
- Potential tax payment, penalty: If you can’t pay back your loan on time, the remaining balance will most likely be counted as a 401(k) withdrawal, and you’ll need to pay any applicable taxes or penalties.
- Possible double taxes: When you repay the 401(k) loan, you do so with after-tax dollars. When you make 401(k) withdrawals down the line, perhaps in retirement, these funds will be taxed again.
- Borrow carefully: While a 401(k) loan might be appealing in some cases, remember that taking money out of an invested retirement account could affect your long-term retirement savings. Losing compound interest over five years can be a high cost that you might not be able to repay.
401(k) loans vs. personal loans
Getting a loan from your 401(k) isn’t the only way to get access to quick cash. You can also take out a personal loan for almost any personal expense. Receiving funds for a personal loan usually takes about one week or less — though some lenders offer next- or even same-day loans once applications are approved.
Here are some important points to keep in mind when comparing 401(k) loans vs. personal loans:
| APR | Generally 1% over the prime rate | Varies |
| Loan amount | 50% of your vested balance or $50,000 (whichever is less) | $600 to $100,000 (with Credible partner lenders) |
| Loan terms | Up to 5 years | 1 to 7 years (depending on the lender) |
| Credit check required? | No | Typically yes |
| Min. credit score | Credit score not required | Usually 620 or higher (though some lenders might accept lower scores) |
| Fees | None | Varies |
If you want to protect your retirement savings, a personal loan could be a better choice compared to a 401(k) loan. Before you borrow, be sure to consider various personal loan lenders to find the right loan for you.
Credible makes this easy — you can compare prequalified rates from our partner lenders in the table below in two minutes.
| Lender | Fixed rates | Loan amounts | Min. credit score | Loan terms (years) |
|---|---|---|---|---|
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 7.99% - 35.99% APR | $7,500 to $50,000 | Not disclosed by lender | 2, 3, 4, 5 |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 9.95% - 35.99% APR | $2,000 to $35,000** | 550 | 2, 3, 4, 5* |
|
||||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 7.99% - 15.19% APR | $10,000 to $50,000 | 740 | 3, 4, 5, 6 |
|
||||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 8.99% - 35.99% APR | $5,000 to $35,000 | 600 | 2, 3, 4, 5 |
|
||||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 6.99% - 24.99% APR | $2,500 to $40,000 | 660 | 3, 4, 5, 6, 7 |
|
||||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 10.5% - 29.99% APR | $5,000 to $40,000 | 640 | 2, 3, 4, 5 |
|
||||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 8.3% - 35.89% APR | $1,000 to $40,000 | 600 | 3, 5 |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 7.99% - 35.99% APR | $2,000 to $36,500 | 600 | 2, 3, 4, 5, 6 |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 5.99% - 23.99% APR | $5,000 to $100,000 | 700 | 2, 3, 4, 5, 6, 7 (up to 12 years for home improvement loans) |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 18.0% - 35.99% APR | $1,500 to $20,000 | None | 2, 3, 4, 5 |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 7.74% - 17.99% APR | $600 to $50,000 (depending on loan term) | 700 | 1, 2, 3, 4, 5 |
|
||||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 8.99% - 23.43% APR10 | $5,000 to $100,000 | Does not disclose | 2, 3, 4, 5, 6, 7 |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 11.69% - 35.93% APR7 | $1,000 to $50,000 | 560 | 3, 5, or 7 years 8 |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 8.49% - 35.97% APR | $1,000 to $50,000 | 600 | 2, 3, 5, 6 |
|
||||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 5.4% - 35.99% APR4 | $1,000 to $50,0005 | 580 | 3, 5, or 7 years4 |
|
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401(k) loans vs. 401(k) withdrawals
Instead of a 401(k) loan, you could choose to make a 401(k) withdrawal instead. The main advantage of making a withdrawal is that you don’t have to worry about paying back a loan — useful if you don’t believe you’ll be able to pay it back within five years. Plus, if you’re 65 or retirement age (as defined by your plan), you may not have to pay any penalties on withdrawals.
However, in most cases, you’ll have to pay taxes on the amount you withdraw, since the IRS counts it as taxable income. A 401(k) loan, on the other hand, doesn’t make you pay taxes on the amount you take (unless you don’t pay it back in time).
Other alternatives to a 401(k) loan
Here are a few other 401(k) loan alternatives to consider:
- Credit card: Depending on how much you need to borrow, a credit card might help you cover the expense. Some cards offer a 0% annual percentage rate (APR) introductory period, which means you could avoid paying interest if you can repay your balance by the end of the period. You can also consider transferring existing credit card balances onto this new card. If you can’t pay off the card in time, however, you could get stuck with some hefty interest charges. Considering this risk, proceed cautiously.
- Home equity loan: If you’re a homeowner, you might be able to tap into the equity of your home. Because your property acts as collateral for this type of loan, you might get a lower interest rate compared to a personal loan. But keep in mind that if you default on the loan, you risk losing your home.
- Home equity line of credit (HELOC): This is another way to access your home’s equity. But unlike a home equity loan, a HELOC is a type of revolving credit that you can access as you need and pay back only what you use. Just remember that if you can’t keep up with your payments, you could lose your home.
- Roth IRA: You may be able to make penalty- and tax-free withdrawals depending on when you made your contributions. For instance, you can do so when you’re over 59 1/2 years old, if you’re only withdrawing your contributions, or you’ve had the Roth IRA account for a minimum of five years. There may be some exceptions, such as if you’re using the distributions to pay for a home or qualified education expenses like college tuition. You don’t need to pay this amount back like you would with a 401(k) loan.
- HSA: If you need funds for a qualified medical expense, you may be able to withdraw money from your health savings account tax-free. For nonqualified expenses, you may be taxed on the amount withdrawn, plus a penalty.
- Brokerage account: The money in this type of investment account is yours to do with as you wish. Making withdrawals means you’re using your own money, and they’re tax-free.
- Savings and checking accounts: If you only need a smaller amount of money, and you have emergency funds, tap into those instead. Then you can work toward replenishing the account.
Compare multiple options before borrowing from retirement savings
Taking a loan from your 401(k) is essentially borrowing from your future self. Even if you pay off your 401(k) loan without issue, you could end up with less money during retirement due to the loss of compounding interest over the five years it takes you to repay the loan.
This reduction in retirement savings could become even worse if you lose a job before fully paying off the loan or fail to continue making loan payments.
This is why it’s important to compare all of your loan options before deciding to borrow from your retirement savings. Though the interest rate and fees might seem initially higher on a personal loan or other alternative, the cost to your future could be much lower.
If you decide to take out a personal loan, remember to consider multiple lenders to find a loan that suits your needs. This is easy with Credible: You can compare prequalified rates from multiple lenders in two minutes — without affecting your credit.
Tip: A 401(k) loan might be appealing because a credit check isn’t required, which means you can borrow even with less-than-perfect credit. However, keep in mind that there are personal loans for bad credit — though these loans typically come with higher interest rates.
If you’re struggling to get approved for a personal loan, consider applying with a cosigner (or co-borrower). Not all lenders allow cosigners on personal loans, but some do. Even if you don’t need a cosigner to qualify, having one could get you a lower interest rate than you’d get on your own.
Emily Guy Birken has contributed to the reporting of this article.
