401(k) loans can be a low-cost borrowing option. However, withdrawing from your 401(k) can run the risk of having a not-so-comfy retirement, so consider alternatives.
A 401(k) loan is money that you borrow from your company-sponsored retirement account. Like other loans, you’ll pay back principal plus interest. But a 401(k) loan isn’t technically a loan.
Essentially, you’re withdrawing money from your 401(k) and you repay it all within the term — typically maxed out at five years. There’s also no lender or credit check.
The lack of credit check is often what makes 401(k) loans attractive to so many borrowers, and you won’t have to fill out a typical loan application. 401(k) loans also tend to come with lower interest rates than other borrowing methods.
But it’s not the most ideal borrowing option. Pulling money from your 401(k) can get expensive if you switch jobs or have trouble making repayments. Because most people don’t have enough in their retirement savings to begin with, a 401(k) loan may also make retiring more difficult down the road.
Most 401(k) plans won’t allow you to borrow more than $50,000 or 50% of your account balance, whichever is less. If your account balance is lower than $20,000, you could borrow up to $10,000 but you’ll likely have to provide collateral. Some employers also set minimums on how much you can borrow — usually $1,000.
Typical 401(k) loan amounts:
| Account balance | How much you can borrow |
|---|---|
| $100,000+ | $50,000 |
| $70,000 | $35,000 |
| $20,000 | $10,000 |
| $15,000 | $10,000 with collateral |
The IRS allows employers to limit the reasons that an employee can use to borrow against their 401(k). If your employer does, it’s not uncommon to them limit your loan for use toward:
Be sure to check with your employer first before borrowing against your 401(k).
401(k) loans are regulated by the IRS, but your loan terms are ultimately determined by your employer.
The interest rate on most 401(k) loans is the prime rate plus 1%, though your exact rate depends on your employer. The prime rate is what many financial institutions give to the most creditworthy applicants, typically hovering around 3% or 4%.
All interest you pay goes back into your 401(k) account. But returns are usually higher than the interest you’re paying, so it doesn’t make up for losses.
Most 401(k) loans come with five-year repayment plans, with the exception of mortgages. The IRS doesn’t specify how long your mortgage can extend, so your repayment term depends on your employer.
Try out our 401(k) calculator to play around with APRs, terms and amounts to calculate how much it may cost you.
If you’re far from retirement, you may have plenty of time to repay and be able to recoup any potential losses from withdrawals. But on the flip side, you may not have a large enough balance to borrow yet. If you’re less than five years from retirement, taking on a 401(k) may not be a good idea. You may not have enough time to repay or recoup from potential losses.
Some say the best time to borrow out of your 401(k) economy-wise is during a recession. The thought process is that if your 401(k) is in stocks during a recession, it’s not growing much anyway.
Regardless of how far away you are from retirement, or what the economy is like, borrowing out your 401(k) is largely considered a last resort lending method. Only take on a 401(k) loan if you’re sure you can repay it on time.
You can, though it’s probably not a good idea since you’ll be hit with a 10% early withdrawal penalty if you’re under the age of 59 and a half. You can learn more with our guide on taking money out of 401(k).
Taking out a 401(k) loan is not as complicated as with other loans. Start by setting up a meeting with your HR department to discuss your options. During your meeting, make sure to:
Your employer might ask you to complete forms before receiving your funds, but it’s nothing as extensive as a typical loan application.
It usually takes at least one week for your 401(k) loan to be disbursed, but it could take two weeks or more. Like most aspects of a 401(k) loan, it depends on how quickly your employer can process your request.
You might want to rule out the following options before taking out a 401(k) loan:
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The low interest rate and easy application process might make 401(k) loans sound like an attractive option. But even those with job stability and impeccable personal finances aren’t completely safe from risk. Take caution when considering this borrowing option — and read our guide to personal loans to learn more about your other loan options.
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