At a Glance

If you’re considering applying for a loan, the primary difference between a personal loan and a 401(k) loan is basic: a 401(k) loan comes out of your own retirement account and you pay yourself back, vs. a personal loan that you get from a bank, credit union, or online lender and repay over time. However, there are several additional differences, as well as pros and cons to both, that should be weighed to help determine which is the right financial move for you.

Read on to learn more about:

401(k) loan vs. personal loan

A 401(k) loan or a personal loan? The answer depends on your personal situation and needs and can be different for everyone.

A personal loan may be better if:

  • You have a good credit history, high credit score, and low DTI.
  • You have a small 401(k) balance.
  • You qualify for low interest rates.
  • You can afford the monthly payment.
  • You need to borrow a larger amount of funds.
  • You want to use the loan to build credit (such as with credit mix and payment history).
  • You don’t have a secure job situation, or your retirement savings plan doesn’t offer a loan option.
  • You’re consolidating debt, as you may be able to reduce interest payments.

A 401(k) loan may be better if:

  • You have secure employment, and your plan offers a loan option.
  • Your credit isn’t good enough to get a low interest rate on a personal loan, or you have poor credit history and a higher DTI.
  • You don’t want to take out the loan, late or missed payments, and other activity to be reported to credit bureaus and appear on your credit history.
  • You have another plan in place to continue saving for retirement.
  • You’re able to pay back the loan within the term (or risk taxes and penalties).
  • You have a high 401(k) plan balance.

How do personal loans work?

Personal loans have fixed interest rates, so the monthly payment remains the same throughout the loan’s term and the interest rate doesn’t change. They are also typically unsecured, so you don’t need to provide any collateral to be approved. Loan amounts, terms, and interest rates depend on factors like the lender, your credit score and history, income, debt-to-income (DTI) ratio, and others.

Once you receive the funds, which you’ll get in a lump sum deposited into your bank account, you can use them for whatever you need. Then, you’ll start making monthly payments to repay the loan until it’s completely paid off.

Learn more: How do personal loans work?

Features of a personal loan

A personal loan is a type of unsecured installment loan. While loan features can vary by lender, most of them typically have:

  • Fixed interest rates over the life of the loan.
  • Fixed monthly payments over the life of the loan.
  • Flexible repayment terms, or amount of time you must repay the loan. Shorter repayment terms have a higher monthly payment, but you save money on interest, while longer repayment terms have lower monthly payments, but you’ll owe more in interest in the long run.
  • Funds can be used for just about anything.
  • Fast, online applications available.
  • Approval and funding process can happen quickly, even within one business day.
  • Interest rates depend on factors like borrower credit score and history, income, DTI, and others. The higher your credit score, the lower the interest rate that you can qualify for.

Pros and cons of personal loans

Personal loans are just one financing option out there, so be sure to do your research to decide if applying for one is the right move for you. Weigh the pros and cons, including:

Pros Cons
  • Unsecured, meaning you don’t need to have assets as collateral.
  • Approval is not guaranteed.
  • Fixed interest rates.
  • High interest rates for borrowers with poor credit.
  • Fixed monthly payments, which makes budgeting easier.
  • Monthly payments may be high depending on the loan’s term.
  • Funds can be used for just about anything.
  • Can negatively affect your credit score.
  • Loan amounts ranging from $1,000 to $100,000.
  • A type of debt that must be repaid or risk defaulting and being sent to collections.
  • Fast application, approval, and funding process.
  • Fees, including origination fees, late payment fees, and prepayment penalties.
  • Low interest rates for borrowers with great credit.
  • Flexible repayment terms.

How do 401(k) loans work?

Plans have different rules, but typically you can borrow up to $50,000 or 50% of your vested balance, whichever is less. These loans often have a maximum repayment term of up to five years, and you must repay the loan plus interest (though the interest rates are typically lower than some other funding options). These repayments can usually be made through paycheck deductions.

You don’t have to pay taxes or penalties when you take out a 401(k) loan. Note that both the repayments and the interest go back into your account, so you’re essentially paying yourself for borrowing the money.

However, when you’re taking money out of the 401(k), you’re missing out on investing the money you borrow in a tax-advantaged account, losing potential growth that could amount to more than the interest you’d repay yourself. Additionally, if you default on the loan, it’s treated as an early withdrawal, and you’ll be subject to taxes and penalties.

Features of a 401(k) loan

401(k) loan features can vary by plan, but may include:

  • Ability to get cash fast for short-term needs.
  • Allows you to borrow money from your retirement savings and pay it back to yourself over time.
  • The interest you pay usually goes back into your own retirement plan.
  • The approval process may be more flexible and lenient.
  • Repayment can be made through paycheck deductions.
  • No credit check required.

Pros and cons of a 401(k) loan

Borrowing from your 401(k) is not a decision that should be taken lightly, and it’s important to know the pros and cons of doing so prior to deciding:

Pros Cons
  • No credit check required and won’t appear on your credit report.
  • Can slow down retirement savings.
  • If your plan allows borrowing, approval is likely.
  • Fees can make the cost of the loan not worth it.
  • Lower interest rates.
  • If you are no longer employed, you must repay the loan quickly or face taxes and penalties.
  • All interest paid on the loan goes back into your retirement plan.
  • Lower borrowing limits than other types of loans.
  • Late or missed payments do not affect your credit score.
  • If you default on the loan, it’s considered an early withdrawal and is subject to taxes and penalties.
  • You can usually borrow $50,000 or 50% of your vested balance, whichever is less.
  • Not all plans offer this option.


This depends on your personal needs and situation. For example, a 401(k) loan offers quick financing, doesn’t affect your credit score, may have lower interest rates, and you repay the interest to yourself. However, it cuts into your retirement savings, the loan amounts are smaller, and you could risk fees and penalties. A personal loan also has quick financing, fixed interest rates, flexible terms, and doesn’t impact your retirement. However, it will impact your credit, you may face high rates or lower loan amounts if you have poor credit, and there are also fees.

No, a 401(k) loan doesn’t impact your credit score. The activity is not reported to the credit bureaus, so it won’t show up on your credit history; therefore, it does not impact your score.

Learn more: Do 401k loans affect credit

If you default on a 401(k) loan, it’s considered an early withdrawal and is subject to taxes and fees. This includes a 10% early withdrawal penalty on the amount you borrow (if you’re under age 59 ½), as well as tax penalties and income taxes.

The Internal Revenue Service (IRS) requires that qualified retirement plans charge a commercially viable interest on the 401(k). Typically, this is a point or two above the prime rate, but it can vary by plan.

Yes, 401(k) loan funds can be used for just about anything, including home renovations or repairs, a down payment on a home, consolidating debt, paying for medical bills, a vacation, or a wedding, covering day-to-day living expenses or emergency/unexpected expenses, and more.