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How does a 401(k) loan work — and is it a good idea?


When you borrow money from your 401(k), you’re essentially your own lender. The loan terms are attractive. There’s no credit check. You get a low interest rate — which you pay to yourself — and repay the loan within five years. And unlike with 401(k) withdrawals, you won’t be subject to additional income taxes and early withdrawal penalties.

All this makes 401(k) loans appear like a viable option when you’re experiencing a financial emergency or looking to fund an important goal. However, it’s wise to learn about the risks before you apply. CNBC Select explains how you can take out a loan from your retirement account and what you should keep in mind before taking this step.

What you should know about 401(k) loans

How to take out a loan from your 401(k)

With a 401(k) loan, you can borrow money from your workplace retirement account and pay it back with interest. Both the balance payments and interest go back into your 401(k) account. The rate can fluctuate and is typically one or two points higher than the prime rate. For example, if the prime rate is 7%, you can expect to pay an 8% or 9% interest rate on your 401(k) loan.

To take out a loan, you’ll first need to check if your plan even allows it. If so, you can request a loan from your plan administrator. According to Fidelity, you can borrow as much as 50% of your retirement savings, up to a $50,000 maximum. The specific terms depend on your plan’s rules. If your request is approved, you’ll receive money from investments in the account that are sold to cover the loan amount.

In most cases, you’ll have five years to pay back the loan, provided you stay with the employer who sponsors the 401(k). If you leave your job before repaying the full balance, you’ll likely have a very short period to finish repayment.

What to consider before borrowing from your 401(k)

Alternatives to a 401(k) loan

Wells Fargo Reflect® Card

On Wells Fargo secure site

  • Rewards

  • Welcome bonus

  • Annual fee

  • Intro APR

    0% intro APR for 21 months from account opening on purchases and qualifying balance transfers. 18.24%, 24.74%, or 29.99% Variable APR thereafter.

  • Regular APR

    18.24%, 24.74%, or 29.99% Variable APR on purchases and balance transfers

  • Balance transfer fee

    Balance transfers fee of 5%, min $5.

  • Foreign transaction fee

  • Credit needed

Capital One SavorOne Cash Rewards Credit Card

Information about the Capital One SavorOne Cash Rewards Credit Card has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

  • Rewards

    Earn 10% cash back on purchases made through Uber & Uber Eats, plus complimentary Uber One membership statement credits through 11/14/2024, 8% cash back on Capital One Entertainment purchases, earn unlimited 5% cash back on hotels and rental cars booked through Capital One Travel; Terms apply, 3% cash back on dining and at grocery stores (excluding superstores like Walmart® and Target®), 3% cash back on popular streaming services and entertainment, and 1% cash back on all other purchases

  • Welcome bonus

    Earn a one-time $200 cash bonus after you spend $500 on purchases within the first 3 months from account opening

  • Annual fee

  • Intro APR

    0% intro APR on purchases and balance transfers for 15 months

  • Regular APR

    19.99% – 29.99% variable 

  • Balance transfer fee

    3% for the first 15 months or at a promotional APR that Capital One may offer you at any other time. No fee for amounts transferred at the Transfer APR

  • Foreign transaction fee

  • Credit needed

Remember that while a 0% APR card can be excellent for interest savings, you only want to use it if you have a solid plan to repay the balance before the zero-interest period expires. Otherwise, you’ll be hit with expensive interest charges.

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Take out a personal loan

If you need to borrow a large sum that will take a couple of years to pay off, a traditional personal loan can be helpful. You’ll have a consistent monthly payment over several years, as well as a fixed interest rate. You’ll likely pay more interest to a lender than you would yourself with a 401(k) loan — but you’ll also avoid the risks that come with taking money from your retirement account.

Plus, it’s possible to get a personal loan even with bad credit. CNBC Select recommends OneMain Financial which offers flexible terms and loan amounts. Avant is also a great choice if you need quick funding — borrowers can receive the money as soon as the next day after applying.

OneMain Financial Personal Loans

  • Annual Percentage Rate (APR)

  • Loan purpose

    Debt consolidation, major expenses, emergency costs

  • Loan amounts

  • Terms

  • Credit needed

  • Origination fee

    Flat fee starting at $25 to $onem00 or percentage ranging from 1% to 10% (depends on your state)

  • Early payoff penalty

  • Late fee

    Up to $30 per late payment or up to 15% (depends on your state)

Click here to see if you prequalify for a personal loan offer. Terms apply.

Not all applicants will be approved. Loan approval and actual loan terms depend on your ability to meet our credit standards (including a responsible credit history, sufficient income after monthly expenses, and availability of collateral) and your state of residence. If approved, not all applicants will qualify for larger loan amounts or most favorable loan terms. Larger loan amounts require a first lien on a motor vehicle no more than ten years old, that meets our value requirements, titled in your name with valid insurance. APRs are generally higher on loans not secured by a vehicle. Highly-qualified applicants may be offered higher loan amounts and/or lower APRs than those shown above. OneMain charges origination fees where allowed by law. Depending on the state where you open your loan, the origination fee may be either a flat amount or a percentage of your loan amount. Flat fee amounts vary by state, ranging from $25 to $500. Percentage-based fees vary by state ranging from 1% to 10% of your loan amount subject to certain state limits on the fee amount. Visit omf.com/loanfees for more information. Loan proceeds cannot be used for postsecondary educational expenses as defined by the CFPB’s Regulation Z such as college, university or vocational expense; for any business or commercial purpose; to purchase cryptocurrency assets, securities, derivatives or other speculative investments; or for gambling or illegal purposes.

Borrowers in these states are subject to these minimum loan sizes: Alabama: $2,100. California: $3,000. Georgia: $3,100. North Dakota: $2,000. Ohio: $2,000. Virginia: $2,600.

Borrowers in these states are subject to these maximum loan sizesNorth Carolina: $9,000 for unsecured loans to all customers, $9,000 for secured loans to present customers. Maine: $7,000. Mississippi: $12,000. West Virginia: $14,000. Loans to purchase a motor vehicle or powersports equipment from select Maine, Mississippi, and North Carolina dealerships are not subject to these maximum loan sizes.

Example Loan: A $6,000 loan with a 24.99% APR that is repayable in 60 monthly installments would have monthly payments of $176.07.

Time to Fund Loans: Funding within one hour after closing through SpeedFunds must be disbursed to a bank-issued debit card. Disbursement by check or ACH may take up to 1-2 business days after loan closing.

Avant Personal Loans

  • Annual Percentage Rate (APR)

  • Loan purpose

    Debt consolidation, major expenses, emergency costs, home improvements

  • Loan amounts

  • Terms

  • Credit needed

  • Origination fee

  • Early payoff penalty

  • Late fee

    Up to $25 per late payment after 10-day grace period

Click here to see if you prequalify for a personal loan offer.

Bottom line

Why trust CNBC Select?

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.





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