401k Loan vs Personal Loan: What's the Difference?

When you need extra cash for unexpected expenses like medical bills or a home repair, finding the right way to cover the cost can be overwhelming. Depending on how much you need to borrow, you might be wondering if dipping into your 401(k) is a good idea or if you should apply for a personal loan. You’re not alone — account administrator Empower reported about 2.6% of savers took a 401(k) loan from their workplace loan in the third quarter of 2023, an increase from 1.7% in the same time period in 2020.¹ Additionally, nearly 23 million Americans had unsecured personal loans in 2023, with an average balance of about $11,500.²

Each loan has its own set of requirements, pros and cons. Understanding the differences between these options could help you make the best decision for your financial situation.

What is a 401(k) loan?

A 401(k) loan is a loan that you take out from your employer-sponsored 401(k) retirement savings plan.³ This means you’re borrowing money from yourself, using the funds that you’ve been saving for your retirement. Unlike other loans, a 401(k) loan doesn’t involve a bank or lender.⁴ Instead, it uses your retirement savings as the source of the loan.

How do 401(k) loans work?

Borrowing from your 401(k) might seem like an easy way to access cash in a pinch, but before you dip into your retirement savings, it’s important to understand how this loan works.

Let's review eligibility requirements, interest rates and repayment terms:

Eligibility

To be eligible for a 401(k) loan, you need to have a 401(k) account with your employer. Not all 401(k) plans allow loans, so you’ll need to check with your plan administrator to see if this option is available to you.⁵

Generally, 401(k) plans set specific rules about how much you can borrow. In 2025, the Internal Revenue Service (IRS) limits the amount to 50% of your vested account balance or $50,000, whichever is less.⁶ "Vesting" in a retirement plan means ownership. The amount that you contribute to your 401(k) from your paycheck belongs to you, but the amount that some employers contribute as a match is often subject to a vesting schedule. Each year, you gain greater ownership over those funds, or, in other words, they “vest.” If you leave the company, the vested funds are yours, but you will lose any unvested funds.⁷

Some plans might have additional restrictions or requirements for a 401(k) loan. It’s important to understand the specific rules of your 401(k) plan before deciding to take out a loan, as they can be very different depending on your employer and the plan provider.

Interest

One of the unique aspects of a 401(k) loan is how the interest rate works. When you borrow from your 401(k), you pay yourself back with interest. The interest rate is usually set by your plan and may be lower than what you’d find with other types of loans.

Typically, the interest rate is based on the prime rate plus 1 or 2 percentage points.⁸ The target federal funds rate, set by the Federal Reserve, is used to determine the prime rate. The federal funds rate is the interest rate that banks charge each other for overnight loans. The prime rate is usually a few percentage points higher than the federal funds rate. So, when the Fed raises interest rates, the prime rate also increases.⁹

Since you’re paying the interest back into your own account rather than to a lender, the interest becomes part of your retirement savings. While you won’t earn investment income on the amount you withdrew, you begin earning value again as you pay back the loan. This can make the idea of a 401(k) loan more appealing, since the interest you pay is going back to you.

Repayment

Repayment terms for a 401(k) loan are usually within five years, unless you used the money to buy your primary home.¹⁰ You’ll make regular payments through payroll deductions, which means the money is automatically taken out of your paycheck.¹¹

If you lose or leave your job, the full loan amount might have to be paid back by the tax-filing deadline for the year you took out the money. You may also face an early withdrawal penalty if you’re under 59½ years old.¹²

Pros and cons of 401(k) loans

There are a few pros and cons of 401(k) loans, including:

Pros

• Lower interest rates: Since you’re borrowing from yourself, the interest rate is typically lower than other types of loans. This can make a 401(k) loan a helpful option if you need funds quickly and want to avoid high interest rates associated with other loan options.¹³
• No credit check: Because the loan is funded by your retirement savings, there’s no need for a credit check. This means your credit score won’t be affected by taking out a 401(k) loan, and you can still qualify even if you have a less-than-perfect credit score.¹⁴
• Repay yourself: The interest you pay goes back into your 401(k) account, so you’re essentially paying yourself rather than a lender, which might help you feel more comfortable about borrowing.

Cons

• Risk to retirement savings: Borrowing from your 401(k) could put your retirement savings at risk, especially if you can’t repay the loan on time. If you don’t repay the loan, the remaining balance will be considered taxable income, which means you’ll owe taxes on it and reduce your retirement savings. Not repaying a 401(k) loan could also lead to a big tax bill.
• Potential taxes and penalties: If you leave your job or can’t repay the loan, the remaining balance could be considered a withdrawal. This means you’ll pay taxes and penalties, which could cause financial strain and reduce the amount of money you have saved for your retirement.
• Lost investment growth: The money you borrow from a 401(k) loan stops being invested, so you’ll miss out on potential growth in your retirement savings. While you repay the loan, those funds aren’t earning returns, which could slow down the overall growth of your retirement nest egg.

What is a personal loan?

A personal loan is a lump sum of money you borrow from a lender, bank or credit union that you repay with interest over a set period. Personal loans can be used for a variety of purposes, including consolidating debt, paying major expenses, or covering emergency costs.

Unlike a 401(k) loan, a personal loan is not tied to your retirement savings, and the funds come from a lender rather than your own account.

How do personal loans work?

If you’re approved for a loan, you may see secured or unsecured next to your offer. A secured loan uses collateral, or something of value that you possess, like a car, to back the loan. You may qualify for a lower interest rate or a larger loan amount since the lender will have an asset to collect in the event you can’t pay off the loan. As long as you repay on time, a secured loan could potentially be a good tool to help build or rebuild your credit. Remember that if you default on a secured loan, the lender has the right to take your collateral.

An unsecured loan, on the other hand, means the lender doesn’t require collateral. The lender won’t have the right to take possession of your collateral if you don’t repay the loan, but your interest rate may be higher and your loan amount lower than it might be for a secured loan.

There are a few things you should know before deciding whether a personal loan is right for you:

Eligibility

Each lender has their own eligibility criteria, but most will review the following information to approve your loan application:

• Credit history
• Income and expenses
• Loan purpose ^†
• State of residence
• Value of your collateral, if a secured loan

Although many lenders lean more heavily on your credit score to approve your loan application, some offer personal loans to people who are building their credit. If you’re applying for a OneMain personal loan, OneMain will consider your entire financial picture, including your ability to repay the loan, to find a loan that’s right for your budget.

Before you sign on the dotted line, it’s important to shop and compare offers from different lenders to find the best terms. A great way to find out what types of loans are available to you is to get prequalified. Prequalification gives you a quick look at what loan terms might work for you, but the final details will depend on the information you’ll provide in a full application. Checking for prequalified offers doesn’t affect your credit score and may be done in just a few minutes.

Interest

The interest rate on a personal loan can vary widely based on factors like your credit history, income and the amount of debt you already have. A borrower with a more favorable credit history could qualify for a lower interest rate, while someone with not-so-perfect credit might face a higher rate depending on their financial situation.

Interest rates can be fixed or variable, depending on the terms of the loan. A fixed interest rate means your monthly payment stays the same throughout the loan term, while a variable rate can change over time, potentially increasing your payments. At OneMain, you always get the certainty of a fixed rate and predictable, fixed monthly payments.

Repayment

Repayment terms for personal loans typically range from two to seven years.¹⁵ You’ll make regular monthly payments until the loan is fully repaid. The fixed repayment schedule could make it easier to budget and plan your finances each month. Remember that missing payments can hurt your credit score and lead to additional fees and interest charges.

As always, each type of loan offer has its own eligibility requirements, associated risks and costs. It’s important to consider your needs and financial situation before deciding which option is best for you.

Pros and cons of personal loans

There are various pros and cons to consider before taking out a personal loan, including:

Pros

• Flexible use: Personal loans can be used for a wide range of purposes, from covering moving costs to purchasing an engagement ring. This flexibility allows you to use the funds in a way that best meets your needs.
• Fixed repayment terms: With a fixed interest rate and monthly payment, you’ll know exactly how much you owe each month and when the loan will be paid off, which makes it easy to budget funds.
• Fast funding: You could receive funds the same day you sign your loan agreement documents. At OneMain, for instance, you can get your money as soon as an hour after signing if you use a debit card to receive funds.^‡ Funds can also be paid out by direct deposit (ACH), which is available approximately 1-2 banking days after the loan closes. A paper check can be issued as soon as the same day as the closing.
• Potential to build credit: If you repay your loan according to the terms of your loan agreement, it could potentially boost your credit score.

Cons

• Lump-sum payment: Unlike a credit card or revolving line of credit, a personal loan allows you to borrow a set amount of funds just once. You can’t pull more funds if you have an additional need. It’s important to note, however, that some lenders offer loan refinancing. If approved for a loan refinance, you basically get a new loan with new loan terms, and you use that money to pay off your existing loan. You can then use the rest of the money for other expenses.^¶† Some lenders, like OneMain Financial, also use the term “loan renewal” to describe this same process.
• Potential fees: Some personal loans have origination fees (a payment for taking out the loan), prepayment penalties (a payment for paying the loan early) or other charges such as a late payment fee that can increase the cost of borrowing. It’s important to review the loan terms and understand any fees associated with the loan.
• Potential to impact credit: If you miss personal loan payments or pay late, it can negatively affect your credit score. To avoid this con, be sure to pay on time, every time.
• Credit requirements: Lenders generally consider your credit score when you apply for a personal loan. Depending on your credit score, you may not be able to get the interest rate or loan amount you’re looking for. However, a less favorable credit score doesn’t automatically disqualify you from getting a personal loan. Some lenders, like OneMain, work with a wide range of credit scores to find a loan that works for you.

Should you get a 401(k) loan or a personal loan?

A helpful way to decide between a 401(k) loan and a personal loan is to think carefully about both your current financial needs and your future goals. Here are some questions to ask yourself to help you make that decision:

• What is my current financial situation? Assess your income and expenses to determine which loan option you can afford, and which choice makes the most sense for your financial situation.
• What is the purpose of the loan? Think about why you need the loan and how you plan to use the funds. This may help you determine which loan option is most appropriate for your needs.
• Can I afford the repayments? Make sure you can comfortably make monthly payments for the loan option you choose without straining your budget. Consider your current and future income to determine if you can meet the repayment terms.
• How will this loan impact my future finances, including retirement savings? Evaluate the long-term effects of each loan option. Consider how borrowing from your 401(k) or taking out a personal loan will affect your future financial security.

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The choice is yours

Ultimately, it’s up to you to decide whether to take out a 401(k) loan or a personal loan. Making the right decision for you could help you achieve your money goals comfortably. Be sure to take time to carefully weigh both options, as each comes with its own costs and benefits. If you decide to move forward with a personal loan, you can easily see if you prequalify for OneMain loan offers without affecting your credit score.

Sources

1 https://www.cnbc.com/2023/12/10/more-americans-take-401k-loans-an-indicator-of-financial-stress.html
2 https://www.marketwatch.com/guides/personal-loans/personal-loan-statistics/
3,4,5,8,10,13,16 https://www.experian.com/blogs/ask-experian/401k-loan-vs-personal-loan/
6 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-loans
7 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-vesting.
9 https://www.esl.org/resources-tools/educational-resources/understanding-the-prime-rate
11 https://www.investopedia.com/ask/answers/082015/what-are-best-ways-use-your-401k-without- penalty.asp
14 https://www.equifax.com/personal/education/loans/articles/-/learn/what-is-a-401k-loan
15 https://www.equifax.com/personal/education/credit/score/articles/-/learn/what-is-a-credit-score/