401k loan vs personal loan

If your emergency fund is depleted and you need money quickly, a personal loan vs a 401k loan may be an option. These two kinds of loans are simple to apply for and have quick loan processing times. However, certain characteristics distinguish them. In this article, we will be comparing a 401k loan vs a personal loan, and how the calculator works.

Your situation will determine whether you should take out between a personal loan vs a 401k loan. A 401(k) loan can be a better option because you are borrowing from yourself at 0% net interest. There are no lenders, and you can obtain a loan even if you have bad credit. A personal loan, on the other hand, is a good option if you only need a small amount of money and want to keep your retirement savings intact. However, in order to qualify for a reasonable interest rate, you must have a good credit score.

401k Loan Vs Personal Loan: Definition

What is a 401k Loan?

A 401(k) loan is a loan taken out against the balance in your company’s 401(k) plan. 401(k) loans are not permitted by all employers. And those that do may have strict restrictions on what you can borrow. However, you can typically borrow up to $50,000 or 50% of your vested balance, whichever is less. A 401(k) loan can be repaid over a maximum of five years.

So, what can you do with a 401(k) loan? The good news is that these loans are flexible, which means you can use the money for almost any purpose, including:

  • Investing in home renovations or repairs
  • Making a down payment on a house
  • Getting rid of high-interest debt
  • Taking care of unpaid medical bills
  • Expenses for higher education for yourself, your spouse, or your children
  • Medical bill payment
  • Establishing a business
  • Taking care of day-to-day living expenses

If you take out a 401(k) loan, you must repay it with interest. However, the interest rate may be significantly lower than that of a credit card or other types of loans. Paycheck deductions are commonly used for loan repayment, allowing you to pay your loan balance down automatically each payday.

What Is a Personal Loan?

A personal loan is money borrowed for personal reasons. Personal loans are available from banks, credit unions, and online lenders. Personal loans can be unsecured, which means that no collateral is required. They could also be secured by a savings account balance or a certificate of deposit. This is common with credit builder loans.

Personal loans can be used for the same things that 401(k) loans can be used for. Debt consolidation is a popular application for personal loans. If you have several credit cards with high APRs, for example, you could pay them off with a low-interest personal loan. You would then make a single payment to your personal loan lender in the future. As a result, you may be able to save money on interest while also shortening the time it takes to repay your debt.

Personal loans do have interest charges, and the amount you pay will vary depending on several factors, including:

  • How much money do you need to borrow?
  • Your credit history, credit scores, and income are all important considerations.
  • The loan requirements of the lender

There is no universally accepted minimum credit score for a personal loan. However, the higher your credit score, the easier it may be to obtain approval and the best interest rates. Meanwhile, a lower score may limit your options for bad credit personal loans, which can be more expensive.

Personal Loan vs 401K Loan: Pros and Cons

The primary distinction between a 401(k) loan and a personal loan is that a 401(k) loan comes from your own retirement account, whereas a personal loan comes from a bank, credit union, or another lender. They’re both commonly used options when you need money quickly.

Whether a 401(k) loan vs a personal loan makes more sense depends on how much you need to borrow and what you need the loan for. This is where weighing the pros and cons on both sides can help you determine which one is best suited to your financial situation.

401k Loan Pros:

  • You might be able to get a lower interest rate than you would with a credit card or personal loan.
  • You’re paying yourself interest rather than a bank or lender.
  • There is no credit check, and a 401(k) loan will not appear on your credit report.

401k Loan Cons:

  • If you do not repay a 401(k) loan, the entire balance may be considered a taxable withdrawal by the IRS.
  • If you leave your job, you may be required to pay any remaining loan balance in a lump sum.
  • Taking money out of your 401(k) means you’re missing out on the power of compounding interest growth.

A 401k loan can be convenient, but it’s important to think about the big picture in terms of cost. While you may not pay loan fees, you may be underfunding your retirement savings by withdrawing funds from your plan. While you are repaying it with interest, the interest you pay may be less than the interest your savings could have earned if you had simply left it alone.

Personal Loan Pros:

  • Borrow money without dipping into your retirement savings.
  • Personal loans can provide you with flexible repayment terms that work with your budget.
  • You may be able to qualify for a low-interest rate if you have a good credit score.

Personal Loan Cons:

  • You’re paying interest to a lender, and the higher the interest rate, the more you’ll pay in total over time.
  • If you pay off your personal loan early, you may be charged an origination fee or a prepayment penalty.
  • The amount you can borrow with a personal loan may be less than the amount you can borrow with a 401(k) loan.

Personal loans enable you to obtain funds when you need them without depleting your retirement savings. In addition, if you are unable to repay the loan on time, you will not face tax penalties from the IRS.

401k Loan vs Personal Loan – Calculator

401k Loan Calculator

Borrowing from your 401(k) plan can be a good way to get a low-interest loan, but it puts your savings at risk — as well as potential tax penalties. Using a calculator, you can get an idea of how much a 401(k) loan might cost in monthly payments.

Follow these steps to calculate your monthly payment on a 401(k) loan.

  • Enter the amount you want to borrow under the loan amount.
  • Put the number of years you’ll need to pay off the loan under Loan terms.
  • Under Interest rate, enter the loan’s annual percentage rate (APR).
  • Click Calculate.

The calculator will calculate how much you will pay in principal and interest. It will also compute your monthly payments. If you use the APR of your loan rather than the interest rate, the total interest will include all fees.

Personal Loan Calculator

Personal loans can help you pay off high-interest credit card debt or tackle large bills. Also, personal loans, like any other type of debt, should not be taken lightly. You can begin looking for personal loans once you’ve determined how much you need to borrow and how much you can afford to pay back each month. Personal loan calculators assist you in determining what to expect.

Do you require funds for home improvements, debt consolidation, or unanticipated expenses? A fixed-rate personal loan could be the solution. The personal loan calculator at Bankrate can assist you in calculating monthly payments on a loan.

Why Should You Use a Personal Loan Calculator?

A personal loan provides you with funds to cover a variety of expenses. You will receive the funds in a lump sum following a quick application and approval process. Before you can reap those benefits, however, you must carefully plan how you will use your loan, find the right lender, and negotiate the best deal. All three can be accomplished with the help of the personal loan calculator.

Which Is Better for You: A Personal Loan vs a 401k Loan?

Should you take out a personal loan or invest in a 401(k)? Unfortunately, there is no one-size-fits-all solution. It is entirely dependent on your circumstances. If you qualify for the lowest interest rates and can afford the monthly payment, you have a strong case for a personal loan. You’d also prefer a personal loan if your job situation isn’t rocking solid – if you’re looking for another job or your position is in jeopardy for any reason, a personal loan is far less risky than a 401(k) loan. It doesn’t help to save 15% on interest if you have to pay 40% in penalties for leaving your job. If you don’t need to borrow more than a few thousand dollars, a personal loan makes sense. This is due to the fact that the setup and administration costs of a 401(k) loan can be disproportionately high when you borrow a small amount.

On the other hand, if you are confident in your job, you have a strong case for obtaining a 401(k) loan. This is especially true if your credit isn’t good enough to qualify for a low-interest personal loan. Most 401(k) plans will not charge you more interest if your credit is poor, and in any case, you will pay that interest back to yourself. Another benefit of 401(k) loans is that you can make up missed payments without penalty or damage to your credit.

If you borrow from your 401(k) and then want or need to leave your job, you may be able to avoid some or all of the tax penalties by repaying the 401(k) loan with a personal loan.


The decision between a 401k loan vs a personal loan to meet your borrowing needs is significant because of the impact it can have on your retirement savings. If you can qualify for a low-interest personal loan, consider how much you’ll pay versus how much growth you could miss out on by taking out a 401(k) loan instead. This can help you decide which loan option is best for you.

Personal vs 401k Loan FAQs

Is it better to take out a loan from 401k or bank?

If you use a 401(k) loan to pay off debts and then find yourself in financial trouble again, you have wasted protected savings that could have served as a safety net. At the end of the day, filing for bankruptcy with your retirement savings in the bank is a better financial decision than using those funds to pay down debts.

What is the downside of a 401k loan?

Individuals are frequently permitted to borrow 50% of their 401(k) account balance, up to a maximum of $50,000. The risk of default is a disadvantage of 401(k) loans; if you lose your job, your plan may require you to repay the loan within 60 days.

How is a 401k loan different from other loans?

A loan from your 401(k), like any other loan, must be repaid-with interest within a specified time frame. The key difference with this type of loan is that you’re borrowing money from yourself, which means you’re repaying yourself with interest.

Should I pay off a 401k loan with a personal loan?

If you have a good chance of losing your job before you can repay your 401(k) loan, consider repaying it with a personal loan to protect yourself. If you’re concerned about your job security, apply for a personal loan while you still have the chance to be approved – before you lose your job.

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If you have a good chance of losing your job before you can repay your 401(k) loan, consider repaying it with a personal loan to protect yourself. If you're concerned about your job security, apply for a personal loan while you still have the chance to be approved – before you lose your job.

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