Can you borrow from your 401(k)? Rules, interest rates, and loan details

Your 401(k) is considered one of the best retirement plans for saving and investing money toward your post-work years because of its robust growth capabilities and tax advantages. But in an emergency, you may need to access that money sooner rather than later. That's where a 401(k) loan comes in.

Premature withdrawals from your retirement savings accounts are typically penalized, but a qualifying 401(k) loan withdrawal is exempt from the usual 10% penalty fee. That said, taking out a loan on your retirement savings isn't without consequences.

Let's explore how a 401(k) loan works, how to apply for a 401(k) loan, and whether it might be a good option for you.

Understanding 401(k) loans

What is a 401(k) loan?

A 401(k) loan is exactly what it sounds like: borrowing from your own 401(k) account and paying yourself back with interest over time — typically within five years. You can typically borrow up to the lesser of 50% of your vested account balance or $50,000.

Unlike an early withdrawal, where you typically incur a 10% penalty fee if you're younger than 59 ½, a 401(k) loan does not trigger additional taxes or penalties. However, a 401(k) loan isn't considered a "true loan" since there's no lender or credit score evaluation.

That means your 401(k) loan won't qualify as debt, since it is not considered borrowing in the same way that a personal loan or credit card financing is. Your credit score and debt-to-income ratio shouldn't be affected when you take out a 401(k) loan.

Because the money stored in a 401(k) is invested, borrowing from a retirement account always comes with the risk of missing out on potential growth and compound interest. Even though you must pay yourself back the borrowed amount (plus interest), you won't be able to make up for the lost time and potential gains you would have earned if that money had remained in your account. Plus, 401(k) loans can cut into some of the tax advantages of these retirement plans.

How do 401(k) loans work?

To borrow money from your 401(k), you'd need to ask your employer about its 401(k) loan options and fill out the necessary paperwork for the plan provider. Your employer is not responsible for approving or denying loan requests, and plan providers have no obligation to approve your loan request. Rules vary, such as with certain 401(k) providers allowing you to take out multiple loans simultaneously, while others don't allow them at all.

Remember that 401(k) loans don't incur the 10% penalty fee for regular 401(k) early withdrawals. However, you still typically have to pay origination fees, maintenance fees, and interest, depending on plan rules — you'll just pay this back to yourself. That said, the loan needs to be paid with post-tax money rather than pre-tax deductions. So, if you're paying yourself back into a traditional 401(k), you're essentially being taxed twice — once with after-tax repayments and again when you withdraw the money in retirement.

Typically, the IRS requires you to make at least quarterly 401(k) loan payments to avoid classifying the loan balance as a distribution. That said, if you're falling behind with payments, you should aim to pay some and communicate with the plan provider to get back on track and possibly avoid paying additional taxes and penalties, such as if you qualify for a hardship exemption.

Reasons to consider a 401(k) loan

Here are some reasons taking out a 401(k) loan might make sense:

• Purchasing a primary residence, covering a down payment, or making important home improvements
• Paying off high-interest debt, such as credit card debt
• Paying for emergency expenses like hospital bills, funeral costs, or car payments
• Covering business expenses for self-employed and small-business owners getting off the ground

That said, you have to make sure the upside outweighs the downsides. If you're using a 401(k) loan for something non-essential, like upgrading your kitchen cabinets, then you could be hurting your retirement more than it's worth.

401(k) loan rules

Eligibility requirements

To qualify for a 401(k) loan, you typically must currently work for the company that sponsors your 401(k) plan. If you have an old 401(k) from a previous employer, consider rolling the funds into a new 401(k) or IRA, although you can't take loans from an IRA either.

After that, it comes down to your 401(k) provider and its policies. Plan providers may review your history, debt-to-income ratio, loan amount, loan reason, and time employed by your employer to determine if you're a good fit.

Some plan providers won't approve a new 401(k) loan request if you already have an outstanding 401(k) loan. In that case, paying off the existing loan balance is in your best interest before requesting a new one. Also, if you have a 401(k) loan and leave that employer, you generally have to pay back the loan at that time, perhaps with a grace period such as within 60-90 days of your last day.

Maximum loan amount

Your provider may have its own loan limits, but the IRS sets overarching limits on how much you can borrow in total: up to $50,000 or 50% of your vested 401(k) balance, whichever is less. However, there's an exception to this rule: If you have less than $10,000 of vested funds, you could borrow up to your entire vested balance, rather than 50%.

There are also some nuances, such as how an existing 401(k) loan within the past 12 months reduces your borrowing limit.

Let's look at an example of how a 401(k) loan would work: You need $25,000 immediately to pay off high-interest debt, and you have a vested 401(k) balance of $60,000. If you took out a 401(k) loan, you could receive a maximum of $30,000 (the lesser of $50,000 or 50% of your vested balance). So, you might take out $25,000 to pay off the high-interest debt and then repay the 401(k) loan on a quarterly basis. Doing so might mean you pay less interest than if you kept your previous debt.

Depending on the plan, your spouse's consent might be required before borrowing more than $5,000. Your plan provider may also have a minimum required amount if taking out a 401(k) loan, such as $1,000.

Repayment terms and conditions

Borrowers typically have up to five years to repay their 401(k) loan. An exception is if they're using the loan to purchase a primary residence. It's also possible to qualify for a hardship exemption, which might give you more time to repay without the loan counting as a distribution, but don't rely on this, as it's hard to know what will count.

How frequently the payments must be made within those five years varies by plan provider, but the IRS requires you to contribute to your 401(k) loan at least once per quarter.

That said, you might prefer to pay back the loan more frequently. Auto-scheduled repayment plans can help you make regular contributions toward your loan that fit into your monthly budget.

401(k) loan interest rates

How 401(k) loan interest rates are determined

401(k) loan rates are typically lower than interest rates on personal loans or credit cards. The rate is usually based on the prime rate plus 1%. The prime rate as of the end of March 2025 is 7.50%, so an average 401(k) loan interest rate would be around 8.5%, compared to personal loans and credit cards that can have rates well into the double digits.

Theoretically, the interest you pay on your loan amount is meant to compensate for some of the lost growth it would have earned if it had remained invested. So, you benefit from relatively low borrowing costs while having that interest go back into your retirement account, rather than to a bank.

"The interest rate on 401(k) loans tends to be relatively low, perhaps one or two points above the prime rate, which is less than [what] many consumers would pay for a personal loan," says Arvind Ven, CEO and founder of Capital V Group in California. "Also, unlike a traditional loan, the interest doesn't go to the bank or another commercial lender; it goes to you."

401(k) loan rates vs. personal loan rates

The average interest rate for a 24-month personal loan is over 12%, which is significantly higher than rates for 401(k) loans, which are currently around 8.5%. But there's a huge variance; personal loan rates can roughly range from around 6% to 36%, and you might even face higher rates if seeking fast financing and depending on factors like your credit score and income.

The difference in interest rates is only one factor though. Also consider that the interest you pay on a personal loan goes to the lender. At least with a 401(k) loan, you are paying yourself. 401(k) loans are also typically fixed, so you won't need to worry about fluctuating rates, while some personal loans have variable rates. However, you might not want to risk your retirement by taking money out of your 401(k), especially if you end up not being able to repay the loan in time.

Impact of interest rates on loan repayment

While you technically pay interest back to yourself on a 401(k) loan, you're essentially sacrificing potential investment growth. What makes 401(k) plans so powerful is their long-term wealth-building capabilities. By taking out a loan instead of letting your investments grow, you diminish their compounding abilities. Plus, you're missing out on some tax benefits with a traditional 401(k), as you repay the loan with after-tax dollars, with withdrawals later taxed as income.

So, depending on your situation, you might be better off borrowing money from another source or finding a way to not borrow at all, especially if you have trouble saving for retirement and want to ensure you leave yourself a nest egg.

401(k) loan pros and cons

Advantages of 401(k) loans

• Easy access to funds: One of the biggest benefits of getting a 401(k) loan is that you'll quickly access cash to cover things like medical expenses or home repairs. During these emergencies, other sources of short-term financing, like credit cards, can be far more expensive. And you don't have to pay early withdrawal penalties vs. actually taking money out of your 401(k).

• No credit check is required: Generally, qualifying for a loan involves a hard credit pull, temporarily lowering your credit score. Moreover, having a bad credit score may hurt your ability to secure a low rate or prevent you from getting accepted altogether. Luckily, 401(k) loans don't require credit checks.

  Still, some plan providers can consider credit scores and your financial situation when reviewing your loan application, but this isn't required and isn't particularly common.

• Paying interest to yourself: "With a 401(k) loan you are paying interest to yourself rather than a third-party bank or credit card company," says Bethany Riesenberg, SVP, finance at GeoWealth. "In many cases, the interest rate is lower than credit card rates, so it may make sense to take out a 401(k) loan to pay off high-interest debt you have."

Disadvantages of 401(k) loans

• Potential impact on retirement savings: The biggest drawback of a 401(k) loan is that the money you take out of your 401(k) account won't grow. Even if you pay the money back within five years, including any interest, this still may not make up for the money you lost if market growth occurred at a higher rate on average during those five years.

  Fees are another issue, since borrowing from your 401(k) is far from free. Yes, you'll pay interest back to yourself, but that's still extra money you'll need to hand over that you might have preferred to use elsewhere. Plus, based on your plan, you may pay an origination fee and a maintenance fee to take out a 401(k) loan.

  Also, if your plan provider requires you to repay the loan before making contributions again, you might miss out on employer matches during those years when you aren't contributing to your 401(k), not to mention potential growth from your own contributions.

  "Some plans do not allow you to continue to contribute to your 401(k) if you have a loan outstanding," says Riesenberg. "That means if you take five years to pay off the loan, it will be five years before you can add funds to your 401(k), and you will have missed savings opportunities as well as missing out on the tax benefits of making 401(k) contributions."

• Repayment risks and penalties: If you're unable to meet 401(k) loan repayment requirements, the amount borrowed from your vested 401(k) balance may be treated like a distribution (subject to a 10% withdrawal penalty). The company managing your 401(k) will report it to the IRS on Form 1099-R.

  "By then, it's treated as a distribution, which includes more fees, so it's important to keep up with payments and stay on track," says Riesenberg.

  This repayment risk includes when leaving or losing your job, so it's possible that even if you intended to pay back your 401(k) loan on time, you can't afford to repay the full balance when leaving your job and you get hit with the 10% withdrawal penalty, plus taxes.

• Double taxation: Another thing to consider is that your loan repayments are made with after-tax dollars (even if you use the loan to buy a house), and you'll be taxed again when you withdraw the money later during retirement. This double taxation can significantly chip away at your gains.

Steps to request a loan from your 401(k)

• Contact your 401(k) plan provider: To know if your 401(k) plan allows loans, you must first contact your plan provider. If you don't have the contact information, contact your employer's human resources department for the correct information. From there, your plan provider can give you the necessary forms and terms for taking out a loan.
• Complete the required paperwork: You can complete the appropriate 401(k) loan application. This involves the loan amount, intended purpose, current financial information, and loan history. 401(k) loans for buying a primary residence require additional paperwork, including the purchase and sales agreement for the property.
• Receive the 401(k) loan: On average, 401(k) loan approvals take one to two weeks. You may be able to access the funds as soon as 10 days after submitting your request. The money will be distributed to a qualifying bank account.
• Pay off your loan through regular payments: The five-year time limit on your loan begins once the money leaves your 401(k) and enters your bank account. The IRS requires quarterly repayments. However, your plan provider may require you to pay a minimum each month.

Managing a 401(k) loan

Repayment strategies and tips

You should ideally repay your 401(k) loan as quickly as possible. Borrowing from retirement savings is generally not recommended because it hinders the growth potential of your savings. However, this may not be realistic for you.

How quickly you can pay back your loan depends on your financial situation and cash flow. While paying off your loan is crucial, you shouldn't neglect your other necessary expenses, such as paying down credit card debt, making monthly car payments, or paying your mortgage.

Before taking out a loan on your 401(k), consult a financial advisor about your current financial situation and goals. Your 401(k) provider might offer a complementary session with an advisor to discuss this type of issue, or your employer might provide similar support. If a 401(k) loan seems right for you, the repayments should be integrated into your monthly budget as part of your financial plan.

What happens if you change jobs or leave employment?

If you lose or leave your job during repayment, the remaining loan amount is typically due when you end your employment, perhaps with a brief grace period. If you cannot repay your 401(k) loan by the plan's deadline, the remaining balance will be considered a distribution, and you'll need to pay taxes and a 10% early withdrawal fee penalty on the amount. So, this is a big risk that often gets overlooked, as you might not have the funds to pay back the 401(k) loan in time.

401(k) loan alternatives

While taking a loan from your 401(k) can sometimes be cost-effective, given that you're repaying interest to yourself, and rates are relatively low, the risk of interrupting your retirement savings might not be worth it.

A simplistic way to look at this issue could be whether the missed growth rate outpaces the interest rate on alternative financing. For example, if you're missing out on an average of 10% investment growth by taking out a 401(k) loan, and you could instead find financing at a 6% interest rate, it might be less expensive to take the alternative financing option.

Still, this is a complex issue, so before taking out a 401(k) loan, be sure to compare the full pros and cons vs. other options such as a:

Home equity loan

Homeowners may be able to borrow a large sum of money by taking out a home equity loan. Doing so can come with higher limits than 401(k) loans, and you don't interrupt the growth of your retirement savings. The average home equity loan interest rate as of late March 2025 is 7.59% for a 15-year term. However, a big risk of home equity loans is that if you can't repay the loan, you could lose your home.

HELOC

A home equity line of credit (HELOC) is similar to a home equity loan, except you get access to a credit line that you can draw from as needed over a given period, rather than taking out the loan all at once. The average HELOC interest rate as of late March 2025 is 7.82% for a 20-year term.

While there's also a risk of foreclosure if you can't repay, a HELOC might be preferable over some 401(k) loans, such as if you only need to borrow a little bit here and there and can still keep your retirement savings growing.

Personal loan

As mentioned, personal loans tend to have much higher interest rates than 401(k) loans, but if you don't want to risk your home equity, or that's not an option if you're not a homeowner, then a personal loan might still be preferable in some cases.

For example, even if it doesn't work out the best for you on a dollar-for-dollar basis, some people have a very hard time sticking to their savings goals, so the fact that you can leave your retirement savings untouched while borrowing from another lender might be what works best for you.

Brokerage account

Rather than borrowing money at all, if you have relatively liquid assets, like investments within a brokerage account, you might be better off selling those to cover your financial needs, rather than taking out a 401(k) loan.

In both cases, you could be missing out on investment growth, but at least you're not giving up the tax benefits of a 401(k), and you're keeping a clearer divide between retirement and non-retirement money. However, you'll have to account for issues like capital gains taxes if selling investments within a brokerage account, as well as things like transaction fees.

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