Borrowing Loan against 401(k) Plan

A tempting option too many people who are in need of a loan can be to borrow against their 401(k) plan. The reason why this is so tempting is that the money is there for your use and it is easy to get a loan from yourself. When you go to pay the money back it is like you are paying yourself back. This is a very good advantage.

There are rules to borrowing from your 401(k). The rule that is currently in effect is that you can borrow up to fifty percent of your 401(k) or up to $50,000. The smaller of the two amounts is what you will be allowed to borrow.

Before you decide that this is what you wish to do you should take into account all of the advantages and disadvantages of borrowing against our 401(k). This is a lot of money to borrow and should be borrowed wisely.


There are several advantages to getting a loan from your 401(k). The main advantage is that you will not have to apply for and qualify for a payday advance loan because you are using your own money and borrowing from yourself. Another advantage that is in your favor is that the interest rate will be lower than a regular loan and better yet the interest that you pay will be going back into your account. Other advantages are that you will have five to ten years to pay the loan back in full and of course you will avoid penalties by taking out a loan against the 401(k) rather than taking the money out without using a loan.


When borrowing against your 401(k) you will slow down the growth of your 401(k) account. Many times the loan will be repaid through your payroll deduction plan. This will lessen your amount of the paycheck that you take home every month. This might cause you to have problems meeting your monthly expenses.

A large disadvantage to having a loan against the 401(k) is that if you were to ever leave your job before the loan is paid off you will have to repay the entire balance within sixty days of your termination date or you will have to pay large taxes on the original amount of the loan.

There are many other advantages and disadvantages to taking loans for bad credit out on your 401(k) plan. Only some of these are listed in the above article. Before deciding that this is the perfect idea for your situation you should think hard and long before doing it. There are the possibilities of major tax consequences if your employment changes. This is probably the biggest disadvantage of all of them. Most financial advisors will tell you not to borrow against your 401(k) for this reason.

Borrowing against your 401(k) can be a large amount of help for someone who needs money fast and who has no other choice but this should be used as a last resort.

There are too many risks associated with this type of loan. Other loan options are available and much less risky.