By Kim Porter
Edited by Samuel Mountjoy401(k) Loan vs. Personal Loan: Which Is Right for You?
By Kim PorterEdited by Samuel Mountjoy
Quick Answer
- A 401(k) loan allows you to borrow money from your retirement account and doesn’t require a credit check.
- A personal loan comes from a lender and offers larger loan amounts that won't affect your savings.
- The best choice depends on your credit, loan needs and whether you want to avoid borrowing from your retirement account.
When you need to borrow money to cover a large expense or tide you over during an emergency, you have several options. A 401(k) loan, where you borrow money from your retirement account, can be quick and cheap, while a personal loan offers larger loan amounts and won't affect your savings. They each work differently and come with benefits and drawbacks, so the right one for you depends on your preferences and needs.
| 401(k) Loan | Personal Loan | |
|---|---|---|
| Source of funds | Your 401(k) retirement account | A bank, credit union or other financial institution that offers personal loans |
| Maximum loan limits | $50,000 | $100,000 |
| Approval speed | Immediate | Same day up to a week |
| Average interest rates | 7.75%* (though you pay this rate to yourself since all payments and interest go back to your account) | 11.86%** |
| Repayment terms | Typically up to 5 years | 1-7 years |
| Restrictions on loan funds | Typically none | Minimal, but may have some limits |
| Credit impact | None | Loan application and payment history can affect credit |
*Source: Fidelity Investments, as of August 2026
**Source: U.S. Federal Reserve, as of June 2026 (most recent data available); based on a 24-month loan
What Is a 401(k) Loan?
A 401(k) loan is a type of loan that allows you to borrow money from your retirement savings. About 80% of 401(k) plans offer this type of loan. You can borrow up to $50,000 or 50% of your 401(k) account balance, whichever is less, and the interest rate is determined by the fund administrator. After requesting the loan, you'll typically receive the money in your next paycheck and can use it for any purpose. In most cases, you'll need to repay what you borrowed within five years.
How Does a 401(k) Loan Work?
Taking out a 401(k) loan is often more straightforward than applying for a traditional loan, but there are still important rules to understand.
- Application process: The process is typically simple and involves logging in to your account and specifying how much you'd like to borrow. Some plans require written consent from your spouse for loans greater than $5,000.
- Loan limits: The loan limit on 401(k) loans is either 50% of your account balance or $50,000, whichever is less. The plan may make an exception if 50% of the balance amounts to less than $10,000; in that case, you may be able to borrow $10,000.
- Interest rates: The fund administrator sets interest rates on 401(k) loans. The rate is typically based on the current prime rate and is often one or two points higher. These interest payments (along with the principal) go back into your 401(k) account.
- Loan term: These loans have a maximum term of five years, though you can extend repayment if you're using the funds to buy a primary residence.
- Payment schedule: You must make payments at least quarterly, and you may even need to repay the full balance if you leave your job. If you can't come up with the money, the IRS will consider any unpaid balance a plan distribution.
Pros and Cons of 401(k) Loans
Borrowing from your 401(k) offers some advantages over traditional loans, but it also comes with trade-offs that could affect your long-term retirement savings.
Pros
-
Easy application process: Getting a 401(k) loan is usually a matter of requesting the money from your plan administrator. You won't go through an underwriting process as you would with a traditional loan.
-
Relatively low interest rate: Interest rates on 401(k) loans are typically lower than what you'd find on a personal loan. Plus, the interest you pay is put back into the 401(k) account instead of going to a lender.
-
No credit impact: The plan sponsor won't check your credit when you apply for the 401(k) loan or report your payments to the credit bureaus. This means the 401(k) loan won't have an effect on your credit.
Cons
-
Losing out on earnings: When you take money out of your 401(k), you miss out on any gains you could potentially earn on those funds if they had stayed invested. The money will be reinvested as you pay back the loan, but it can still put a dent in your retirement savings that you might not recoup.
-
Default can be expensive: If you don't repay the money per your loan terms, the IRS will consider any unpaid balance a plan distribution. This could result in paying early withdrawal penalties and income taxes unless you qualify for an exception.
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Might not be an option: You can only take out a 401(k) loan if your employer allows it and you're still employed at the company that sponsors it. Plus, the low loan limits could prevent you from borrowing the amount you need.
What Is a Personal Loan?
A personal loan is a financing option you get through a lender, such as a bank or credit union. You'll need to go through an application and underwriting process that involves a credit check. Options vary with each lender, but loan amounts may range from a few hundred dollars to $100,000 and repayment terms often stretch from two to seven years. Because most personal loans are unsecured, interest rates are often higher than mortgage rates and home equity loans. The funds can be used for any purpose with some limitations.
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View all of our Best Personal Loans for 2026 to see what you’re likely to qualify for, and the rates and terms you might get.
How Does a Personal Loan Work?
Unlike a 401(k) loan, a personal loan is issued by a lender and usually requires a credit check. Here's how the process typically works.
- Find a lender. Compare lenders' rates and terms to find a loan that fits your needs and that you can afford. You can do the legwork yourself, or you can compare multiple lender offers in one place using a resource like Experian's personal loan comparison platform.
- Application process: You'll then submit a loan application and authorize a hard credit pull. The lender may also need documentation, such as tax forms and paystubs, to verify your income.
- Loan limits: The borrowing amount on a personal loan can range anywhere from a few hundred dollars to $100,000. It depends on the lender's options and your financial profile. Generally, a strong credit history and income can help you qualify for a higher amount.
- Interest rates: The national average interest rate on a two-year personal loan was 11.86% in June 2026. Unlike a 401(k) loan, the interest you pay goes to the lender.
- Loan term: Lenders set their own repayment terms, but they often range from about two to seven years.
- Payment schedule: Payments on a personal loan are usually made monthly. Late payments can incur a late fee and may hurt your credit.
Pros and Cons of Personal Loans
Pros
-
Potentially high loan amounts: Depending on the lender's loan limits and your creditworthiness, you may be able to borrow more than you would with other options, including a 401(k) loan.
-
Won't affect your assets: Personal loans are often unsecured, meaning you won't have to put your assets at risk. You also won't take away from your retirement savings and risk losing out on the power of compounding.
Cons
-
Impacts your credit: Applying for a personal loan adds a hard inquiry to your credit reports, which may have a slight negative impact on your credit scores. And while making on-time payments can help keep your credit healthy, any defaults may have the opposite effect.
-
Relatively high costs: Personal loans typically carry higher rates than 401(k) loans (though it's important to factor in potential earnings losses with the latter).
Learn more: Best Personal Loan Rates
Should I Get a 401(k) Loan or a Personal Loan?
When to Consider Getting a 401(k) Loan
Consider choosing a 401(k) loan if:
- You have fair or poor credit. A 401(k) loan doesn't require a credit check, so your credit score won't affect your eligibility or interest rate.
- You want lower interest rates. Interest rates on 401(k) loans are often lower than those on personal loans, and the interest you pay goes back into your retirement account rather than to a lender.
- You have job security. If you expect to remain with your employer while repaying the loan, you're less likely to face early repayment requirements.
- You don't need to borrow a large amount. You can borrow up to $50,000 with a 401(k) loan, which may be enough to cover your needs.
When to Consider Getting a Personal Loan
A personal loan may be the better option if:
- You want to protect your retirement savings. Leaving your retirement funds invested gives them more time to potentially grow through compound earnings.
- You have excellent credit. Good credit may help you qualify for competitive interest rates and favorable loan terms.
- You need to borrow a larger amount. Some lenders offer personal loans of up to $100,000, which exceeds the amount you can borrow with a 401(k) loan.
- You prefer a longer loan term. Some personal loans come with terms longer than five years, making monthly payments more manageable
- You're unsure about job stability. A personal loan isn't tied to your employer, so changing or losing your job typically won't trigger an accelerated repayment requirement.
Alternatives to 401(k) Loans and Personal Loans
A 401(k) loan and a personal loan aren't the only ways to borrow money. Also consider the following, depending on your needs:
- Emergency savings are designed to cover unexpected expenses if you lose your job, your car breaks down or a major home appliance needs to be repaired or replaced. Dip into this fund before touching your retirement savings.
- Home equity loans allow you to borrow a lump sum of money that you repay in installments over time with interest. Your home acts as collateral, which may help you qualify for a low interest rate—but it also puts your home at risk.
- Home equity lines of credit (HELOCs) give you access to a revolving line of credit that you can draw from as needed and then repay with interest. This type of financing also uses your home as collateral and typically comes with a variable interest rate.
- Introductory 0% APR credit cards offer a low interest rate for a certain period of time, such as 12 to 21 months, when you open the account. Qualification depends on your creditworthiness, income and other factors.
Frequently Asked Questions
The Bottom Line
Borrowing money is a big decision, and the financing you choose can affect your monthly payments, borrowing costs like interest and fees, and the impact on your credit. A strong credit history may boost your approval odds and help you receive good loan terms.
Checking your credit report and FICO® ScoreΘ for free through Experian can help you see whether you have room to improve. As long as you pay your bills on time every month without fail, and attend to the other factors that contribute to credit scores, monitoring your credit scores will be a satisfying endeavor.
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About the author
Kim Porter
Kim Porter began her career as a writer and an editor focusing on personal finance in 2010 and has since been published everywhere from Yahoo! Finance to U.S. News & World Report, Credit Karma, USA Today, Fortune and more.
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