401(k) Loan vs Personal Loan: Which Is Right for You?

Whether to borrow from a 401(k) or take out a personal loan is a decision that will depend on your unique financial situation and goals. There are several variables to consider. For instance, when you borrow from a 401(k), you pay interest to yourself vs. to a lender — but 401(k) borrowing nevertheless reduces your retirement savings. A personal loan can often offer more cash, but taking out a personal loan can impact your credit score.

Here, learn more about these options for accessing cash so you can make the right decision for your needs.

Understanding 401(k) Loans

Retirement plans such as your 401(k) are designed to tuck away money toward expenses you’ll face later in life. And while you didn’t initially open and contribute to a retirement account to take money out prematurely, if you’re in need of some funds, you might consider a 401(k) loan.

Yes, it’s entirely possible to borrow against your 401(k). While it depends on the specifics of your employer’s plan, you might be able to access up to half of what’s vested in your account, or $50,000, whichever is less, during a 12-month period. And if your vested balance is $10,000 or less, you can borrow the whole vested amount if your employer allows it. So someone with a vested balance of $40,000 could borrow a maximum of $20,000, and someone with a vested balance of just $7,000 could take out $7,000.

Usually, you’ll have up to five years to pay back your loan amount, along with interest. The interest rate and terms of the repayment depend on your employer’s plan. When you repay the 401(k) loan, the principal and interest go back into your account.

How 401(k) Loans Work

Taking out a loan from your 401(k) or the retirement vehicle known as a 403(b) doesn’t require a credit check nor does it show up on your credit report as debt. As mentioned, you’re essentially borrowing from yourself. There’s no third-party lender involved, so there are fewer steps in the application process. Plus, your loan payments go straight back into your retirement plan.

Restrictions and 401(k) withdrawal rules can vary according to your employer’s plan, so it’s probably a good idea to talk to a benefits administrator or rep from the retirement account for specifics.

Pros and Cons of Borrowing From Your 401(k)

Looking at the advantages and downsides of borrowing against your 401(k) can help you decide whether a 401(k) loan or personal loan is the right financing choice for you.

Pros

First, consider the upsides of borrowing from your 401(k) account:

•   Doesn’t require a credit check: Because you’re taking out a loan against yourself and there’s no outside lender involved, a 401(k) loan doesn’t require a hard credit inquiry, so it won’t negatively impact your credit score.

•   Easier to obtain: These loans can be easier to get, and you don’t have to jump through as many hoops (including the credit check mentioned above) as other forms of financing.

•   Lower interest rate: While this hinges on your credit, borrowing against your 401(k) often comes with a lower interest rate than other financing options, such as taking out what’s known as a personal loan or using your credit card. This means it can cost you less in interest.

Interest rates are set by the fund administrator and are usually the prime rate but may be higher. As of August 2026, the prime rate is 6.75%.

•   Won’t show up on your credit report: Another plus of a 401(k) loan is that it doesn’t show up on your report as a form of debt, so you won’t have to worry about your payment history impacting your credit in any form.

•   No penalties or taxes: As long as you don’t default on the loan, you won’t have to pay the taxes and 401(k) early withdrawal penalties that come with making early distributions. (This is a benefit of taking a 401(k) loan vs. taking a 401(k) distribution, which will trigger taxes and possibly penalty fees if you are under the age of 59½.)

•   Interest goes back to you: While you have to pay interest on your 401(k) loan, that money goes into your retirement account.

Cons

Now, review the potential downsides of taking out a 401(k) loan:

•   Not all 401(k) plans allow loans: Many plans do offer the ability to take out a 401(k) loan, but not all of them. Check with your plan administrator to learn whether this is even a possibility for you before planning on getting funds via this method.

•   You might have to pay back the loan right away: Should you lose your job or change jobs, you might be required to pay the remaining balance on your loan quickly. That can be a tall order, especially after a major financial blow such as a job loss.

•   Smaller retirement fund: When you take money out of your retirement plan, that means losing out on the money in an account designated for your nest egg. Because the clock will be set back, it may take you longer to hit your retirement savings goals.

•   Missing out on potential earnings: Taking money out of your 401(k) means losing out on any potential growth on that money if it were sitting in the account instead. Although you pay yourself interest on the loan, the earnings on your returns could be more than the interest.

•   Possibility of taxes and penalties: If you don’t pay back your debt in a timely manner, you could owe taxes and penalty fees on it. That’s because it becomes a 401(k) distribution vs. a loan if you don’t keep up with your payments.

•   Lower loan amounts: How much you can borrow from a 401(k) account has limits. Currently, you can borrow up to half of what’s vested in your account to a maximum of $50,000. If you have less than $10,000 vested, you can borrow the full vested amount. That may or may not suit your needs.

•   Longer funding times: If you’re approved, you’ll typically receive your 401(k) loan within two weeks of submitting your application.

Overview of Personal Loans

Personal loans are a type of installment loan where you’re approved for a certain loan amount and receive the entire amount upfront. Personal loan amounts vary from $1,000 to $100,000 (some large personal loan amounts go even higher), but the exact amount depends on your approval.

You’re responsible for paying off the personal loan during the repayment term, which is usually anywhere between one and seven years. The time you have to pay off the loan depends on the lender and the specifics of your loan.

Personal loans also come with interest (typically, but not always, at a fixed rate). Your rate depends on factors such as the lender, your credit score, your debt-to-income ratio, and other aspects of your finances. As of May 2026, the national average for a 24-month personal loan at a commercial bank is 11.86%.

Types of Personal Loans

There are different types of personal loans to learn about so you can decide which one might be best for you:

•   Secured personal loans: Secured personal loans are loans that are backed up by collateral, such as a car, home, or other valuable property. Should you fall behind on your payments, the lender can seize your collateral to recoup the money. While you risk a valuable possession, secured loans usually have lower credit score requirements and other less stringent financial qualifications. Plus, you can get a higher amount than with an unsecured personal loan.

•   Unsecured personal loans: Unsecured personal loans are loans that don’t require any collateral. They usually have higher credit score requirements and more strict approval criteria than their secured loan counterparts. Unsecured vs. secured personal loans usually have lower amounts available.

•   Fixed-rate personal loan: A fixed-rate personal loan can be unsecured or secured. The interest is the same throughout your loan term, which makes for predictable monthly payments.

•   Variable-rate personal loan: A loan with a variable vs. fixed interest rate, however, can see the interest charges go up and down throughout your repayment term. This means the amount you’ll end up paying in interest on the loan is unknown. Plus, budgeting might be harder, as your monthly payments could change.

Personal loans offer a lot of flexibility. You can use them for most any purpose, from funding a major home improvement project to making a big-ticket purchase to financing a wedding or vacation. In some cases, personal loans are geared toward specific purposes:

•   Home improvement loans: A home improvement loan is an unsecured personal loan that can be used for repairs on normal wear and tear, general maintenance, or toward a renovation project.

•   Debt consolidation loans: Debt consolidation loans are used to take multiple loans and lump them together into a new, single personal loan. The main benefits are that debt consolidation loans can potentially lower your interest rate, monthly payment, or both.

Advantages and Disadvantages of Personal Loans

Next, take a look at the pluses and minuses of personal loans.

Pros

•   Quicker access to funding: You might be able to tap into the funds of your personal loan as soon as one hour after approval, though you’ll likely receive funds within 1-5 days. So, if you need money in a flash, this could be a good option for you.

•   Flexible amounts and repayment terms: Unlike 401(k) loans, where there’s a maximum borrowing limit of $50,000 and a repayment term of five years, personal loans have a wide range of borrowing amounts and repayment periods. You’ll likely have a better chance of finding a personal loan that’s a good fit for your time frame vs. with a personal loan.

•   Lower interest than other financing options: The interest rate of a personal loan can range from around 6%-36%, and the average rate on 24-month personal loans at commercial banks stands at 11.40% as of February 2026. While they might not be lower than the 401(k) loan rate, personal loan rates can be lower than using a credit card or payday loan to make purchases.

Cons

•   Impacts your credit score: When you take out a personal loan, the lender needs to do a hard pull on your credit. This usually reduces your credit score by a few points and will impact your score for a few months.

Also, since your payments are reported to the credit bureaus, if you fail to keep up with payments, your score could be dinged. Finally, taking on a loan also drives up your credit utilization, which can also negatively impact your score.

•   Fees and penalties: Some personal loans have origination fees, which can add to your loan amount and your debt. Plus, you might incur late fees. On the flip side, the lender could charge a prepayment penalty if you’re ahead of schedule on your payments. This is to recoup any losses they would’ve earned on the interest.

•   Additional debt: While a 401(k) loan is an additional financial responsibility, personal loan debt means making payments and owing interest that doesn’t go back to you. Instead, you’ll be on the hook for payments until the loan is paid off.

Recommended: Personal Loan Calculator

Key Comparison Factors

Here are key factors to compare when evaluating borrowing from a 401(k) vs. personal loan:

•   Interest rate: The higher the interest rate, the more you’ll pay for the same amount of borrowed money.

•   Repayment term: The shorter the repayment term, the higher the payments. Conversely, the longer the repayment term, the lower the payments (but you’re likely to pay more interest over the life of the loan).

•   Impact on retirement savings: You’ll want to weigh the different ways a loan can eat into your retirement goals. For example, a 401(k) loan will shrink your retirement fund. However, if you take out a personal loan, you may have less cash available to put toward retirement since you need to make your monthly payments.

•   Credit score implications: Understanding how taking out either loan can impact your credit score is important, especially if you are building your credit score. A 401(k) loan doesn’t require a hard credit pull nor will payments show up on your credit report. A personal loan, however, does require a hard credit inquiry, and late payments will end up on your credit file and can lower your score.

•   Tax considerations: If and when you’ll be taxed is also something to consider. As for whether a personal loan is taxable, the answer is usually no. But a 401(k) loan could be taxable if you fail to meet certain loan requirements, such as sticking to your repayment schedule.

401(k) Loan vs. Personal Loan: Side-by-Side Comparison

Here’s a quick reference guide to the rules of borrowing with each method.

Feature	401(k) Loan	Personal Loan
Credit Check	Not required; no impact on credit score.	Required; hard credit inquiry may affect credit score.
Funding Time	Typically within two weeks.	One to five days (can be as quick as one hour).
Borrowing Limit	Up to half of vested balance, capped at $50,000. If vested balance is $10,000 or less, you may be able to borrow the full vested amount.	Varies by lender; amounts from $1,000 to $100,000+.
Repayment Term	Usually up to five years.	One to seven years.
Interest	You pay interest to your own 401(k) account.	You pay interest to the lender.
Tax Implications	None, unless you fail to repay and it becomes a distribution.	Generally not taxable.
Credit Reporting	Does not show up as debt on your credit report.	Payments reported to credit bureaus; missed payments can hurt score.

Scenarios: When to Choose Each Option

If you are contemplating the choice of taking a 401(k) loan vs. personal loan, reviewing these scenarios could help you make your decision.

401(k) loan

Going with a 401(k) loan might make more financial sense in these scenarios:

•   You’re far off from retirement. You likely have time to pay back the loan and replenish your account, which can help you hit your target amounts within your desired time frame.

•   You can repay the loan in five years. If the time frame and loan amount aren’t suitable and you fall behind with payments, the amount you owe can be treated as a distribution, and you’ll be hit with early withdrawal penalties and taxes.

•   Your credit score doesn’t qualify you for a personal loan with favorable terms. A hard credit inquiry isn’t part of tapping funds from 401(k) retirement savings.

•   You don’t want to borrow from a lender (with a 401(k) loan you are, in a sense, borrowing from yourself), and you feel confident you can stay on top of your payments.

Personal loan

A personal loan might be the stronger choice in these situations:

•   You want quicker access to the funds. You may be able to apply, be approved, and access personal loan funds within just a few days. A 401(k) loan can take a couple of weeks to move funds into your bank account. You will, of course, need to meet the lender’s criteria, such as minimum credit score and debt-to-income requirements.

•   You are hoping to borrow more than the $50,000 cap on 401(k) loans. A personal loan may allow you to access twice that amount.

•   You feel you might be changing jobs soon or that your job is in jeopardy. If you leave or lose your job, a 401(k) loan could be due in less than the five-year term.

With either option, you want to make sure you have a steady income to repay the loan. It’s important to prioritize paying off the loan. Otherwise, you may potentially get hit with fees and/or damage to your credit score.

Recommended: Using Your 401(k) to Pay Off Debt

Long-Term Financial Impact

Borrowing from a 401(k) vs. taking out a personal loan can have a different long-term impact on your money situation. In deciding between the two, you’ll want to take a close look at the following:

Effect on retirement savings: Taking out a 401(k) loan means a reduction to your retirement fund, potentially a loss in growth in your investments, and possibly also a setback to your retirement goals. While a personal loan doesn’t have the same impact on your retirement savings, making loan payments each month can mean you’ll have less money available for a tax-advantaged retirement account.

Potential opportunity costs: Taking on more debt, whether against your retirement account or a loan through a lender, means your money will be tied up in debt repayments. In turn, you might miss out on opportunities to boost your finances, whether that’s putting money toward education, a business venture, your savings, or an investment account.

Debt management considerations: With a 401(k) loan, you’ll want to feel comfortable that you can shore up your retirement funds by paying off the amount within five years. You’ll be required to make payments at least once a quarter. With a personal loan, the monthly payment and repayment term can vary, but you’ll want to make sure both are a good fit for your budget and goals.

The Takeaway

Personal loan or 401(k) loan? In deciding whether to borrow a 401(k) loan or a personal loan, you’ll want to understand the basics of how each works, their respective advantages and disadvantages, and what factors to consider before landing on the best choice for you. A 401(k) loan can avoid the potential negative credit impact of a personal loan, for instance, but there is a limit to how much you can borrow, which could sway your decision.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

FAQ

What happens to my 401(k) loan if I leave my job?

If you lose your job or change workplaces, you might be required to pay back the remaining balance on your 401(k) quickly. If you are deciding between a personal loan and a 401(k) loan and feel you might be changing jobs soon, a personal loan could be the better option.

Can I take out multiple 401(k) loans?

Most plans only allow you to have one 401(k) at a time, and you must pay it back before you can take out another one. However, it’s worthwhile to check with your plan administrator, as you might be allowed to take more than one, as long as the total between the two doesn’t go over $50,000 or half of your vested balance.

How does borrowing from 401(k) vs. personal loan affect my credit score?

A 401(k) loan doesn’t require a hard pull of your credit nor do your payments show up on your credit report, and it therefore doesn’t affect your credit score. A personal loan does trigger a hard credit inquiry, and late or missed payments on your personal loan can negatively impact your score. Taking on a personal loan increases your credit utilization ratio, which may lower your score, but it could also diversify your credit mix, which could be good for your score.

Is a 401(k) loan better than a personal loan?

Which borrowing method is right for you is a very personal choice. Many financial experts recommend against 401(k) borrowing because it delays your progress in saving for retirement and steep penalties result if the loan isn’t paid back on time. However, if you are confident in your job security and sure you can make the loan payments, you’ll likely pay a slightly lower interest rate than you would with a personal loan, and the interest you pay will go back into your own 401(k) account.

What are the risks of borrowing from a 401(k)?

A very real risk of borrowing from a 401(k) is that you will experience an unexpected setback — such as a job loss — that makes the loan repayment due immediately. If you don’t have the funds available to repay the loan, it will be treated as a withdrawal. And if you are under 59½, you’ll owe both taxes and a 10% penalty on the outstanding balance of the loan. A secondary risk of borrowing this way is that you will miss out on any investment gains that might come from having the money in the 401(k).

---

Photo credit: iStock/JulPo

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOPL-Q326-075