Guide to 401(k) Loans vs Personal Loans
Share this article:
Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
What Is a Personal Loan?
What Is a 401(k) Loan?
How Does Borrowing Against a 401(k) Work?
Pros and Cons of Personal Loans
Pros of Personal Loans
Can help you build credit Collateral is not necessarily required Borrowers with poor credit may qualify for secured personal loans by pledging an asset as collateral Long-term personal loans may offer up to $100K and a lengthy loan repayment schedule
Cons of Personal Loans
May increase your burden of debt Lenders may charge high rates of interest Applying for one can generate a hard inquiry, which can hurt your credit score Missing a payment or defaulting on the loan could damage your credit
Pros and Cons of 401(k) Loans
Pros of 401(k) Loans
You may borrow up to $50,000 from your retirement plan Funds can be used to cover unexpected expenses May feature low rates of interest The interest is paid back to yourself (minus fees potentially) Defaulting on the loan has no negative consequences on your credit score
Cons of 401(k) Loans
The maximum loan amount is $50K The money borrowed is taken out of the market and will not participate in any market gains, which will adversely affect the growth of the retirement funds Defaulting can trigger burdensome income tax consequences, including an additional 10% early distribution tax if you’re under the age of 59½ Employees who resign may be required to pay off the loan balance within a short period Loan approval may require the written consent of the employee’s spouse or partner in some cases
Personal Loans vs 401(k) Loans
Secured vs Unsecured Personal Loan Trade-Offs
Weighing Which Is Best for Your Situation
Checking Out Your Personal Loan Interest Rate
Frequently Asked Questions
About the Author
Share this article: