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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.
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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:
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.
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.
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:
There are consequences from borrowing from your retirement savings, consider these drawbacks before you take out a loan.
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.
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