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The maximum amount on a 401(k) loan is $50,000, or 50% of what you’ve managed to save up. The IRS states that you have five years maximum to repay the loan, and plan for an interest rate a few points above the prime rate. As of September 2022, the prime rate is 5.5%, so 6% or 7% is a good estimate at the time of writing.
Use our calculator to see how much you might pay in interest charges over the course of a 401(k) loan based on the current prime rate, and how much you can or want to borrow. But remember — many consider a 401(k) loan a last resort, and there are many other lending options that may come with less risks.
A 401(k) loan means you’rel borrowing out of your retirement, and it has hefty risks. It’s still “treated” like a more traditional loan, but there’s more at stake.
You’re pulling out money from your retirement fund and losing out on tax-free potential growth. Even if you fully repay the loan, you’re missing out on growth opportunities because you’ve temporarily removed money out of the account, and you may not be able to contribute to the account until the loan is paid off.
If you leave or lose your job while you still have the active 401(k) loan, it’s possible that you’ll be asked to repay the loan quickly — sooner than the typical five-year term. And if you’re unable to, you default, and owe taxes and a 10% penalty if you’re under the age of 59.5.
And on top of all that, not all 401(k) plans offer employees the option to borrow from it, so you’ll need to check with your employer first. A 401(k) account from previous jobs are not eligible for 401(k) loans, either.
Some alternatives to a 401(k) loan include:
401(k) withdraw. If you’re over the age of 59.5, you may be able to draw from your 401(k) without penalties. You may still be eligible to withdraw if you’re younger, but there are disadvantages.
Home equity line of credit. Also known as a HELOC, these lines of credit can offer low rates.
Home equity loan. Home equity loans come in a convenient lump sum, and can be 70% to 80% of your home’s equity if you qualify.
Personal loans. A personal loan can be used for nearly anything and may have considerably less risks than 401(k) loans.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
What’s the average interest rate on a 401(k) loan?
Loan terms and rates are determined by your plan administrator — your employer, in other words. The interest rates on most 401(k) loans is prime rate plus 1% or 2%. The prime rate as of September 2022 is 5.5%.
Since you’re borrowing your own money, the interest isn’t paid to a lender. Instead, the interest is paid back into your 401(k) account.
How long do I have to pay off a 401(k) loan?
If your retirement plan permits loans, you have up to five years to repay your 401(k) loan. The only time the term is longer is if you’re using it to buy a home. And there’s no penalty for early repayment.
It usually takes about one week to get funds from a 401(k) loan. However, in some cases it can take upwards of three weeks or more.
When should I take out a 401(k) loan?
A 401(k) loan is a risky choice, and should be considered a last resort.
Most employer-sponsored 401(k) retirement plans allow employees to borrow against their accounts, but employers can restrict what you’re allowed to use the funds for. You’re also putting your retirement savings at risk, so be careful about what you’re borrowing for regardless of if there’s a restriction.
Situations that may necessitate a 401(k) loan include:
Funeral expenses
Making a down payment on a house
Covering costs to prevent foreclosure or eviction
Paying education costs for yourself or your family members
What am I losing by borrowing from my retirement savings?
There are consequences from borrowing from your retirement savings, consider these drawbacks before you take out a loan.
You’ll lose out on potential gains. You lose the opportunity to benefit from investments on any money you borrow. While the interest you pay offsets some of that, it doesn’t always make up for the lost growth.
You pay more in taxes. Under other circumstances, you don’t have to pay taxes on money you deposit into your 401(k). However, the payments you make toward a 401(k) loan will be with income that has already been taxed — and you’ll get taxed again when you make qualifying withdrawals.
Contributions might not be possible. If you can’t afford regular contributions to your 401 (k) during your loan term, you could lose thousands on your retirement — especially if your employer matches contributions. Your employer might not allow contributions until the loan is paid back.
Losing your job can be even more costly. If you leave your job for any reason, you’ll have to pay back your loan before your federal income taxes are due for the year. If you don’t, it’ll be reported as a distribution and you’ll potentially face taxes and an early withdrawal penalty.
Defaults are treated as distributions. That means you’ll face the same taxes and potential penalties as if you were to withdraw the funds.
The funds aren’t protected from bankruptcy. Once you borrow the funds from your 401(k), they’re no longer protected if you file for bankruptcy — and the court can take them to pay your creditors.
Bottom line
A 401(k) loan comes with a low interest rate and a smooth application process. But you only have five years to pay back your loan, you miss out on the potential growth of your investment and leaving your job can mean facing steep penalties if you can’t pay the loan back immediately.
For a potentially safer way to borrow, read our guide to personal loans.
Bethany Hickey is a personal finance writer at Finder, specializing in banking, lending, insurance, and crypto.
Bethany’s expertise in personal finance has garnered recognition from esteemed media outlets, such as Nasdaq, MSN, Yahoo Finance, AOL and Newsweek. Her articles offer practical financial strategies to Americans, empowering them to make decisions that meet their financial goals. Her past work includes articles on generational spending and saving habits, lending, budgeting and managing debt.
Before joining Finder, she was a content manager where she wrote hundreds of articles and news pieces on auto financing and credit repair for CarsDirect, Auto Credit Express and The Car Connection, among others.
Bethany holds a BA in English from the University of Michigan-Flint, and was poetry editor for the university’s Qua Literary and Fine Arts Magazine.
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