401(k) Loan vs Personal Loan: Limits, Costs and the Job Risk

Published by the Modern Lending Solutions editorial team. Last reviewed: October 30, 2026.

Short answer: a 401(k) loan, if your plan offers one, has no lender and its interest goes to the plan. But the money is out of your retirement account while you repay it, and if you do not repay on the loan's terms, the unpaid amount becomes a distribution that can be taxed, and you may owe an extra 10% tax (IRS). A personal loan costs interest paid to a lender, but missing it does not touch your retirement savings.

The IRS rules for a 401(k) loan

Plans do not have to offer loans. Check the Summary Plan Description or ask the plan sponsor (IRS).
The most you can borrow is 50% of your vested balance or $50,000, whichever is less. If 50% is under $10,000, a plan may let you borrow up to $10,000, but it does not have to (IRS).
You generally must repay within five years, with payments at least every quarter. A loan used to buy your main home can have a longer term (IRS).
The plan must charge a reasonable rate: one that gives the plan a return like a commercial lender would charge for a similar loan (29 CFR 2550.408b-1(e)).
Some plans need your spouse to agree in writing to a loan over $5,000 (IRS).

Example: with a vested balance of $40,000, 50% is $20,000, which is less than $50,000, so up to $20,000 could be borrowed if the plan allows it.

The math on $10,000

Example assumptions, not offers: $10,000 repaid in 60 equal monthly payments. Personal loan at 11.90%, the average rate on 24-month personal loans in August 2026 (Federal Reserve G.19), with no fee. 401(k) loan at 8.00%; your plan sets its own rate.

Plan	Monthly payment	Interest	Who gets the interest
Personal loan, 11.90%, 60 months	$221.94	$3,316.40	The lender
401(k) loan, 8.00%, 60 months	$202.76	$2,165.60	The plan

The 401(k) loan looks cheaper, but its real cost is different. The $10,000 is not invested while it is out of the account, so the account gives up whatever those investments would have earned and gets the loan interest instead. If the investments would have done better than the loan rate, your account ends up smaller; if worse, it does not. Nobody knows that in advance. Ask your plan whether your payments and interest go back into your own account.

What happens if you leave your job

A plan may require you to repay the whole balance if you leave your job or the plan ends. If you cannot, the unpaid balance is treated as a distribution and reported on Form 1099-R (IRS). The previously untaxed amount generally counts as income for that year, and an additional 10% tax may apply unless you are at least 59 1/2 or another exception applies (IRS).

You can avoid the immediate income tax by rolling over all or part of the unpaid balance to an IRA or another eligible plan by the due date, including extensions, of your federal tax return for that year (IRS). This applies to a plan loan offset caused by leaving your job or the plan ending (IRS). Rolling it over means coming up with that amount from other money.

Example: you leave after 24 of the 60 payments above. The balance still owed is $6,470.69. If you are under 59 1/2, no exception applies and you do not roll it over, the 10% additional tax is $647.07. At an example federal income tax rate of 22%, the income tax on it is $1,423.55, so $647.07 + $1,423.55 = $2,070.62 in federal tax, before any state tax. Your own rate may differ.

When each one can fit

A 401(k) loan can fit when your job is stable, the plan offers loans, and you can keep up the payments for the whole term.
A personal loan can fit when you may change jobs soon, or you do not want to take money out of your retirement savings.
Neither fits if the payment is already a stretch. Look first at help that is not a loan.

Before borrowing at all, see the emergency expense help guide for options such as hardship plans with the companies you owe. The payment formula guide shows how the payments above are worked out.

Questions to ask your plan

Does the plan offer loans, and what is the minimum and maximum amount?
What is the interest rate, and do my payments and interest go back into my own account?
How are payments made, and what happens if I leave my job or take a leave of absence?
Is there a fee to set up the loan?

This guide explains federal rules in general terms and is not tax advice. A tax professional can tell you how a distribution would affect your own return.

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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.