401(k) Loans: Should You Borrow Against Your Retirement?

You may be able to use a 401(k) loan to take out some of your retirement money early (before retirement) without having to pay income tax or early withdrawal penalties. You do have to pay it back, however. And borrowing against your 401(k) has risks which could impact your long-term financial health and potentially set your retirement back years. Before tapping your 401(k), learn how 401(k) loans work, what to look out for, and when to consider alternatives.

What is a 401(k) loan?

A 401(k) loan lets you take money out of your 401(k) account before age 59 ½ with the promise to return it plus interest. How much you can borrow depends on how much you have vested in the account — $50,000 is the maximum, but we'll get into more detail on this later. Payments are typically deducted from your paycheck, and the repayment term lasts up to five years. 

401(k) loans can be used to pay for a range of expenses, such as:

• Medical bills
• Home repairs or renovations
• Debt consolidation
• School-related expenses, like tuition, housing, or student loans
• Past-due rent, mortgage, or utilities
• A down payment on a home
• Emergency expenses

You don’t work with a lender to get a 401(k) loan like you would for a personal loan or home equity loan. Instead, you’re technically the lender, so any loan and interest payments go back into your 401(k). But if you switch jobs before paying off the loan, you’ll generally need to pay back the remainder to avoid taxes and early withdrawal penalties. For instance, you may have up to 90 days from your termination date to repay the loan in full. 

Otherwise, the unpaid amount becomes a plan distribution, which is taxable. Plus, if you took out the loan before you turned 59½, you could owe a 10% early withdrawal penalty on any unpaid amount as well. 

401(k) loan vs. 401(k) withdrawal

A 401(k) loan is when you borrow money from your 401(k) with the intention of returning it, typically via regular payroll deductions. Removing money from your 401(k) without the intention of paying it back is a 401(k) withdrawal, also referred to as a distribution. These funds remain permanently removed from your account. 

401(k) withdrawals are usually subject to a tax penalty of 10% if you’re under 59½ plus income tax. But there are exceptions. For example, you can take a 401(k) hardship withdrawal — a maximum of $1,000 — penalty-free once annually to pay for an emergency personal expense. Some plans also allow withdrawals for qualified birth, adoption, or medical expenses. Though you may avoid an early withdrawal penalty in these cases, your withdrawal would still be taxable according to your income tax rate. 

How does a 401(k) loan work?

A 401(k) loan has specific rules on borrowing limits and repayments. Understanding the risks of borrowing against your 401(k) can help you decide if it’s a good option.

Policies

Most 401(k) policies differ between companies. “Some companies allow multiple loans at once, others cap borrowing at one loan at a time,” says Chris Heerlein, chief executive officer of REAP Financial. Your policy’s loan interest rate and repayment terms can vary from one employer to the next, too. Before borrowing, read your policy and ask your employer about restrictions on using your loan funds and what happens with your loan if you take a leave of absence or leave the company. 

Borrowing limits

The most you can borrow from a 401(k) plan is $50,000. But you can’t borrow this amount unless you have at least $100,000 vested in your account. This is because you're limited to borrow up to half of your vested balance. The only exception is if half your vested balance is less than $10,000. Then you can borrow up to $10,000. For example, if you only have $15,000 vested in your 401(k), you could borrow up to $10,000. 

These borrowing limits are the same even if your 401(k) plan allows multiple loans at once. 

Say you have a vested 401(k) balance of $60,000. Per the IRS, you’d be allowed to borrow up to $30,000, or 50% of your vested balance. (Keep in mind, your 401(k) plan would need to allow 401(k) loans.) 

Let's also say that you already took out a loan for $20,000 and have repaid $10,000 of it (you still owe $10,000). Now, you want to borrow a second 401(k) loan. You’d be allowed to borrow up to $20,000, since half of your vested balance is $30,000, and the two loans would total $30,000.

401(k) loan interest rate and fees

Some 401(k) plans charge fees for your loan. This may be a one-time fee for establishing your loan, usually between $50 and $100. Some plan administrators may also charge a loan application fee and an annual maintenance fee. 

You’ll also pay interest on a 401(k) loan based on the current prime rate. However, the interest you pay goes back into your account. “Essentially, the interest payment is like moving money from your left pocket to your right pocket,” says Andrew Hall, certified financial planner, wealth advisor, and vice president of Farther, a wealth management platform.

Repayment 

Like other types of loans, you’ll repay a 401(k) loan over time with interest. Most plans require you to repay your loan in full within five years, although your repayment term may be extended if you’re using the funds to buy a home as your primary residence. You’ll also need to make payments at least once per quarter. 

Changing jobs

If you leave your job when you have an outstanding 401(k) loan, you’ll need to repay the loan in full. This can happen if you quit or get terminated. If you can’t pay it off, your employer will treat it as a 401(k) withdrawal, meaning you’ll be taxed and charged the 10% distribution penalty if you’re under the age of 59½. For example, you may have up to 90 days after your termination date to pay back the outstanding balance in full.

Retirement growth

When you take out a 401(k) loan, the amount borrowed does not participate in market gains (or losses). “While you’re technically borrowing from yourself, the real cost is lost growth,” says Heerlein, who had a client take out a $30,000 401(k) loan and pay it back over five years. “The market performed well during that period, and had they left the money invested, it could have grown by tens of thousands. They repaid the loan, but the lost compounding set them back years.”

Plus, some plans may not allow you to contribute to your 401(k) while you have an outstanding loan. If this is the case and your plan includes employer-matching contributions, you could also lose out on thousands of dollars of “free” money (contributed by your employer) over the term of your 401(k) loan. 

For these reasons, borrowing from your 401(k) can provide short-term financial relief but potentially leave you without as much of a retirement cushion later on.

Credit impact 

A 401(k) loan doesn’t require a credit check, and neither the loan itself nor your payments will be reported to credit bureaus. Even if you don’t repay the loan, it won’t appear on your credit report. So, in terms of impacting your credit, a 401(k) loan carries little risk.

401(k) loans vs personal loans

A personal loan doesn’t affect your retirement savings like a 401(k) loan. With a personal loan, you borrow from a lender and pay that lender back with interest. The lender decides your repayment terms and borrowing limit, but you may be able to borrow more and have longer to repay a personal loan compared to a 401(k) loan.

However, interest rates are often higher on personal loans, and you’ll typically need a credit check to get one.

Here’s how 401(k) loans compare to personal loans:

What is the interest rate on a 401(k) loan?

Plan administrators base the interest rates for 401(k) loans on the prime rate. Usually, 401(k) loan interest is charged at 1% or 2% above the prime rate, which is 7.50% as of March 2025. That makes the interest rate on the average 401(k) loan around 8.50% or 9.50%. 

Compared to personal loans and credit cards, 401(k) loan rates are lower. The latest Federal Reserve data lists an average annual percentage rate (APR) of 12.32% for two-year personal loans and 21.47% for credit cards.

401(k) loans: pros and cons

Borrowing from your retirement savings is something to think about carefully. Here’s what to consider.

Pros of a 401(k) loan

• No credit check: 401(k) loans come directly from your retirement savings, so there’s no need for a lender credit check.
• No credit impact: Loan payments aren’t reported to credit bureaus and so wouldn’t be typically considered if you apply for credit. Even if you don’t pay the loan back, it wouldn’t hurt your score. Instead, it would be treated as a withdrawal, which could result in steep tax consequences and penalties.
• Low interest rate: The interest rate is usually 1% or 2% above the prime rate, which is lower than most personal loans (unless you have excellent credit) and credit cards. 
• Interest is paid to yourself: While 401(k) loans have interest, all interest you pay goes back into your 401(k) account. 
• Avoid early withdrawal and tax penalties: Repaying your loan on time allows you to access your retirement funds without paying taxes and potential penalties on a withdrawal.

Cons of a 401(k) loan

• Your plan may not allow them: Some employers don’t allow 401(k) loans.
• Amount based on vested balance: You can only borrow up to 50% of your vested account balance (up to a maximum of $50,000).
• Can limit growth: The money you borrow won’t participate in market gains, which can affect your 401(k)’s long-term growth.
• Fees: Some plans charge origination and maintenance fees, increasing borrowing costs.
• Taxable distribution if unpaid: If you don’t pay your loan back in full or change jobs before repaying it, the outstanding balance could become a taxable distribution. You also may owe a 10% penalty if you’re under 59½. 
• May require spouse approval: You may need your spouse’s approval to borrow from your 401(k).

How to get a 401(k) loan

Follow these steps to apply for a 401(k) loan:

1. Check your 401(k)’s rules: Your plan’s Summary Plan Description (SPD) outlines everything about your 401(k), including whether it permits loans. If so, the SPD will also detail repayment terms, loan limits, fees, and how to apply.
2. Determine how much you need: Consider how much you really need to borrow from your 401(k) before cutting too deeply into your retirement savings and potentially limiting gains. Account for upfront fees in your calculations.
3. Contact your plan administrator: Reach out to HR to request a 401(k) loan or ask how to do so. Ask any questions you have about the process. 
4. Apply: Follow the steps outlined in your SPD or by HR to apply. Many plans have online self-service portals to submit a digital application, but yours may require a paper application. 
5. Review loan terms: Read the loan agreement to understand your loan’s fees, interest rate, and repayment terms. Also, review what happens if you switch jobs or can’t repay.

401(k) loan alternatives

If you want to explore other options before getting a 401(k) loan, here are a few alternatives that won’t affect your retirement fund.

Personal loan

Personal loans provide a cash lump sum and allow you to pay it off over a period of years, like a 401(k) loan. Personal loans are often available up to $50,000, depending on the lender, but some offer loans up to $100,000 or more, if you can qualify. Lenders consider your credit history, income, current debt, and the loan’s purpose when determining whether you qualify and what rate and loan terms to offer.

Home equity

If you own a home, you might be able to borrow against its equity in the form of a home equity loan or home equity line of credit (HELOC). A home equity loan usually has a fixed interest rate with consistent monthly payments, ideal for large expenses like debt consolidation or home renovations. A HELOC has a flexible draw period and a variable interest rate, which can work better for ongoing expenses or projects with uncertain costs. 

Both options usually come with lower interest rates than unsecured personal loans and can be easier to qualify for. But if you default on payments, your home — the collateral for the loan — is at risk.

Read More: HELOC vs. Home Equity Loan: How to Decide

Roth IRA

You already paid taxes on money you contributed to a Roth IRA, so you can withdraw contributions tax-free and penalty-free at any time. The money you withdraw will permanently leave your account instead of getting repaid. But if you don’t have the extra funds to make 401(k) loan payments, a Roth IRA withdrawal could be a better option.

0% APR credit card

For smaller expenses, consider a credit card with a 0% APR offer. Some credit cards have this option when you open a new account or feature limited-time 0% APR offers throughout the year. 0% APR offers usually last between 12 and 18 months, although some cards allow up to 21 months. It’s best to pay off the entire balance before the offer expires and the card’s regular APR takes effect.

Read More: Personal Loan vs. 0% APR Credit Card

Scale back 401(k) contributions

Adjusting your 401(k) contributions can give you additional cash flow without touching your existing retirement savings. “I’ve seen clients temporarily cut contributions to their 401(k) to free up cash, then ramp them back up once the crisis passes,” says Heerlein. But create a specific timeline for continuing your regular contributions to make sure you get back on track.

Read More:

• HELOC vs. Personal Loan
• Personal Loan Alternatives

Disclosure: Some lending partners that participate in Credible’s comparison marketplace offer loans to borrowers with scores as low as 550. Borrowers with low scores will have fewer lending options than borrowers with higher credit scores.