What Is a 401(k) Loan and How Does It Work?

Sometimes, you need money quickly to take care of a home improvement project or cover medical bills. Tapping into a retirement account like your 401(k) may feel like the only option available. Below, we’ll explain what a 401(k) loan is, how it works and what alternatives you may have.

What is a 401(k) loan?

A 401(k) loan is a short-term loan made against your retirement savings. With a 401(k) loan, you borrow money from your own retirement account (instead of a lender) and repay it over time, with interest (the cost of borrowing), sometimes through payroll deductions. While some plans allow 401(k) loans, others do not.¹ Check with your plan administrator before you make plans to take out a 401(k) loan.

How does a 401(k) loan work?

The Internal Revenue Service (IRS) allows you to borrow up to 50% of your vested account balance or $50,000, whichever is less. "Vested” funds in a retirement plan are the portion of employer-contributed funds that you’re entitled to at a given time. Some plans allow participants to vest the full amount immediately, while others require them to vest gradually over several years.

Some plans might have additional restrictions or requirements. It's important to understand the specific rules of your 401(k) plan before thinking about taking out a loan, as they can be very different depending on your plan and the plan administrator.²

Remember, if you take out your entire 401(k) balance, you’ll have to start over with your retirement savings. It’s typically not advisable to borrow from your 401(k) unless you’ve exhausted all other financing options. A 401(k) loan is usually viewed as a last resort.

Repayment process

In most cases, you’ll be required to repay your 401(k) loan within five years.³ If you’re using the loan to buy a primary residence or you’re a member of the military on active duty, you may have more time to pay back your loan.⁴ Just as you would with a personal loan, you’ll start making regular repayments as soon as you receive the funds. You may continue to contribute to your 401(k) while you’re repaying your loan.

Depending on your 401(k) plan, you might be able to automatically deduct your loan payments from your paycheck — this way you won’t have to think about repayment and transferring the funds on your own.⁵ You will owe interest on what you borrow, but since you’re borrowing from yourself, you’ll pay the interest to yourself.⁶ The interest will be added to your 401(k) account along with the rest of the loan repayment instead of being paid to a lender.⁷

What happens if you leave your job?

If you leave your job before you pay back your 401(k) loan, you typically have to repay the remaining balance quickly, often within 60 days.⁸ If you default on the loan, your 401(k) loan might be considered a 401(k) withdrawal, triggering taxes and potentially early withdrawal penalties if you’re younger than 59½.⁹

Pros and cons of a 401(k) loan

Before you take out a 401(k) loan, be sure to carefully consider the benefits and drawbacks of this type of loan, such as:

Pros

• No credit check required: Unlike most loans, a 401(k) loan doesn’t involve a credit check. If you have a vested balance in a 401(k) and your plan allows 401(k) loans, you could get approved regardless of your credit score.¹⁰
• Fast funding: You may experience a quick application and funding process with a 401(k) loan. Once you request the funds online from your provider, funds may be available within a few days.¹¹
• Simple repayment: You might be able to enroll in payroll deductions through your employer and simplify the repayment process. Plus, you may have up to 5 years to pay off your loan (or longer, if you meet certain qualifications, such as using the funds to purchase a primary residence).¹²

Cons

• Missed retirement earnings: When you pull funds from your 401(k), you lose out on any potential gains it might have earned if it had stayed invested. However, after you pay off a 401(k) loan, you can reinvest the money you repaid, including interest, into your 401(k) account.¹³
• Risk of taxes and penalties if you leave your job: If you switch jobs or leave your current employer for any other reason, you’ll have to pay your 401(k) loan back very quickly.¹⁴
• Not always available: 401(k) loans aren’t an option with every plan. If your plan administrator doesn’t allow a 401(k) loan, you will need to find an alternative solution.¹⁵

When might a 401(k) loan make sense?

Your individual situation will typically determine whether it’s worth moving forward with a 401(k) loan.

A 401(k) loan may work if you:

• Have exhausted other borrowing options: If you have no other way to get the cash you need, a 401(k) loan might help you out.
• Need money quickly for the short term: Since a 401(k) loan is typically quick and easy to get if your plan offers them, it might be an option if you must cover an expense right away.
• Are confident you’ll stay at your job and can comfortably repay the loan on time: A 401(k) loan may be less risky if you know you’ll remain at your job for the duration of the loan and can afford to make your repayments on time.¹⁶

A 401(k) loan may not work if you:

• Are planning to change jobs soon: If you know your employment situation will change soon, a 401(k) loan likely doesn’t make sense. Once you leave your current employer, you’ll have to repay your loan quickly.
• Need more than the allowed amount: A 401(k) loan lets you borrow 50% of your vested 401(k) balance or $50,000, whichever is less. Depending on your needs, this may not be enough money.
• Are using the funds for nonessential expenses: While a 401(k) loan can come in handy when you’re in a financial pinch, it’s not designed to cover nonessential expenses, like vacations, for example.
• Cannot comfortably repay the loan: As with any other type of loan, you’ll need to pay back a 401(k) loan. If you don’t feel confident that you’ll be able to, don’t take one out.¹⁷

Steps to get a 401(k) loan

If you’re interested in a 401(k) loan, follow these steps.

1. Check if your plan allows 401(k) loans

Some 401(k) plans allow loans while others do not. Consult with your plan administrator to find out whether a 401(k) loan is an option.

2. Check your 401(k) balance

Before you request a loan, make sure you have the funds in your account. You may not have enough vested to get the loan amount you need.

3. Review loan terms and limits

Make sure you understand how a 401(k) loan works before you apply. Review your plan’s loan limits, as they may be different from the IRS limits. Also, familiarize yourself with the repayment schedule and interest rate.

4. Submit a loan request, typically online

To formally apply for a 401(k) loan, you can usually log into your 401(k) account and complete the application process online. Be prepared to state how much money you would like to borrow.

5. Review the loan agreement carefully

If you’re approved, you’ll receive a loan agreement that outlines the final details of your loan. Take a close look at it to make sure everything makes sense for your budget and goals. If you have questions, ask your plan administrator before moving forward.

6. Receive your funds

Once you sign the loan agreement, you’ll receive the funds. In most cases, your plan administrator will disburse them through direct deposit or a check.

401(k) loan alternatives

Before you borrow from your retirement savings, it’s a good idea to explore other options, including:

Personal loans

With a personal loan, you apply for funding through a lender like OneMain Financial, bank, credit union or online lender. If you’re approved, you’ll receive a lump sum of money and repay it with interest through fixed monthly payments. Most lenders let you apply for a personal loan online, and they typically disburse the funds electronically. At OneMain, you can get your money as fast as one hour after loan signing when using your debit card to receive funds.^†

A personal loan can be secured or unsecured. While a secured loan is backed by collateral, such as an asset that you own (like a car), an unsecured loan is not. A secured loan may be easier to qualify for than an unsecured loan, and it may offer a higher borrowing limit and a lower interest rate. An unsecured loan may be approved more quickly because there is no collateral to evaluate.¹⁸ OneMain offers both secured and unsecured loans.

Home equity loans

If a lender determines you have enough equity in your home, a home equity loan could be worth exploring. A home equity loan is a secured loan that allows you to borrow against your home's equity, using your home as collateral. Home equity means the difference between what you owe on your mortgage and the assessed value of your home. You’ll receive a lump sum of money all at once, similar to a personal loan. Your home is the collateral for the loan, so if you don’t make your loan payments, the lender may put your property into foreclosure to make up for their losses.¹⁹

Home equity line of credit (HELOC)

Just like a home equity loan, a HELOC allows you to borrow against your home’s equity. A HELOC is a revolving line of credit secured by your home. It lets you withdraw funds as needed, which you repay with interest. A HELOC may be helpful if you’re unsure of exactly how much money you need. As with a home equity loan, your home is the collateral for the loan, meaning if you default, you may risk foreclosure.²⁰

401(k) plan hardship withdrawals

If you need funds due to financial hardship, a 401(k) hardship withdrawal might be a better option than a 401(k) loan. A 401(k) hardship withdrawal is not a loan — rather, it lets you pull money from your account if you have immediate and heavy financial need as defined by the IRS. In this case, you won’t face a 10% early withdrawal penalty if you are under age 59 1/2. However, you will owe income taxes on the amount you withdraw.²¹ As of 2026, you might qualify for a 401(k) hardship withdrawal if you’re confronted with specific expenses, such as:

• Medical expenses for you or your, your spouse or dependents
• College tuition or other qualifying higher education expenses
• The birth or adoption of a child
• Recovery from a federally declared disaster
• The purchase of your first home²²

Be sure to check the IRS website and speak to a tax expert, financial advisor or your plan administrator to see if your need qualifies.

Make an informed choice on 401(k) loans

A 401(k) loan could be helpful in certain cases, but it’s not always the best option. Before you take out a 401(k) loan, consider all your options, run the numbers and speak with a financial advisor, tax expert or plan administrator if you’re unsure as to whether it’s a good choice. In most cases, a 401(k) loan should only be used as a last resort, especially if you don’t want to derail your retirement goals and you have other ways to access funds.

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Sources

1, 2, 3, 4 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-loans
5 https://www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp
6 https://www.nerdwallet.com/article/loans/personal-loans/401k-loans
7 https://www.equifax.com/personal/education/loans/articles/-/learn/what-is-a-401k-loan/
8 https://www.kiplinger.com/article/t001-c000-s002-will-a-401-k-loan-default-hurt-my-credit.html
9 https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans
10, 11, 12, 13, 14, 15 https://www.experian.com/blogs/ask-experian/401k-loan-vs-personal-loan/
16, 17 https://www.bankrate.com/retirement/borrow-from-401k-loan/#when-it-makes-sense
18 https://www.nerdwallet.com/article/loans/personal-loans/secured-vs-unsecured-loans
19, 20 https://www.bankrate.com/home-equity/what-happens-if-you-default-on-a-heloc-or-home-equity-loan/
21, 22 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions