APR 5.99% – 35.99%·$100 – $50,000

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Head to head

Personal loan vs 401(k) loan.

A 401(k) loan looks attractive because the interest rate is low and the payments go back into your own account. Once you factor in the market returns you forgo while the money is out, the if-you-leave-your-job balloon payment, and the tax exposure on default, the math usually shifts.

Side by side

Personal loan vs 401(k) loan

AttributePersonal loan401(k) loan
APR / cost5.99% to 35.99%, paid to lenderPrime + 1-2%, paid back to your own 401(k)
Loan amount$500 to $50,000Up to 50% of vested balance, max $50,000
Credit checkYes (soft → hard)None (it's your own money)
Time to fundNext business day1-3 weeks depending on plan administrator
Effect on credit scoreNew trade line, on-time payments build creditNone, not reported to credit bureaus
Opportunity costNone (your investments keep compounding)Borrowed funds are out of the market, missing returns
Leave-employer riskNone, loan continues normallyLoan typically due in full by the next tax-filing deadline; default = taxable distribution + 10% penalty if under 59½
Tax treatmentNo tax impact (it's a loan)No tax impact if repaid; default triggers ordinary income tax + 10% penalty
Verdicts by scenario

Which wins, when.

  1. 01

    You're confident you'll stay at your employer through the loan term

    Winner: 401(k) loan

    If you're sure you won't leave or be laid off, the 'interest paid to yourself' math is genuinely attractive, especially for small short-term needs.

  2. 02

    Job security is uncertain or you might change employers

    Winner: Personal loan

    The leave-job balloon payment is the biggest 401(k) loan trap. A personal loan continues normally regardless of employment changes.

  3. 03

    You'd skip future 401(k) contributions to repay the loan

    Winner: Personal loan

    Pausing contributions during repayment forfeits employer match, typically the highest-return investment available to you. Don't let a 401(k) loan crowd out the match.

  4. 04

    Funding a long-term need (debt consolidation, home repair)

    Winner: Personal loan

    Spread the cost over 3-5 years without raiding retirement. Opportunity cost on 5 years out of the market is real.

Common questions

Frequently asked.

What's the real cost of a 401(k) loan?+

It's not the interest rate (you pay that to yourself). It's the foregone market growth on the money while it's out of the account, plus the catastrophic tax exposure if you leave your job before repayment. A loan of $20,000 out for 4 years at an 8% missed return costs roughly $7,200 in unrealised compounding.

Does my employer have to offer a 401(k) loan?+

No. Plan sponsors choose whether to allow loans. Roughly 80% of plans permit them, but check your Summary Plan Description before counting on one.

Can I borrow from a Roth IRA instead?+

There's no formal Roth-IRA loan, but you can withdraw your contributions (not earnings) at any time without tax or penalty. The 60-day rollover rule can also function as a short-term loan window. The trade-off is the same opportunity cost on the missing balance.

What happens if I leave my job with an outstanding 401(k) loan?+

Under current IRS rules, you have until the due date of your federal tax return (with extensions) for the year you left to repay the balance in full. If you don't, the outstanding balance is treated as a taxable distribution. You owe ordinary income tax on the full amount, plus a 10% early-withdrawal penalty if you're under 59½.

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