When You Should Get a 401(k) Loan vs. a Personal Loan

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Whether you need to borrow money or you’re looking for ways to boost your credit score, you might be thinking about getting a loan. When it comes to a 401(k) loan versus personal loan, though, you might not know which one is better for you.

If you want to know the difference, here’s some information to help you choose between the two options.

What’s a 401(k) loan?

A 401(k) loan is a loan from your future self. It’s not a typical loan since you’re not borrowing money from a bank or lender. Instead, you’re borrowing from what should be your retirement savings. Levi Sanchez, a co-founder of Millennial Wealth, said there’s an unpredictability factor in borrowing from yourself.

“The major risk to 401(k) loans is the opportunity cost of tax-deferred growth in your account,” he said. “If you take a $50,000 loan from your 401(k) and the market rises 20% as it did in 2017, you’re missing out on $10,000 worth of growth in your account!”

Also, borrowing from yourself ties you down to your current employer, Sanchez said. If you change your company or get fired, you’ll have a small repayment window.

“If you leave [your job] before paying off the loan, you’ll owe ordinary income tax plus the 10% early-withdrawal penalty on the outstanding loan balance if [it’s] not repaid within 60 days, resulting in a potentially devastating tax bill that sets you back years in your retirement savings,” he said.

One in five Americans doesn’t have any money saved for retirement, according to a recent study from Northwestern Mutual. So if you don’t have anything saved in a retirement fund, a 401(k) loan won’t be possible.

What’s a personal loan?

A personal loan usually is an unsecured loan. No collateral is required when applying for a personal loan, but your creditworthiness is evaluated to see how responsible you are with money. Personal loans are different from typical secured loans, such as a car loan or a mortgage. Personal loans tend to have higher interest rates than secured loans as well as some other loans, such as student debt. But the rate varies depending on your creditworthiness. The better your credit score, the lower the interest rate in your repayment terms.

Personal loans can help you cover a big expense that you wouldn’t be able to afford. They also give you the opportunity to consolidate high-interest debt, helping you keep more money in your pocket.

“Oftentimes, personal loans are used to consolidate and pay off higher-interest debts associated with credit cards,” Sanchez said. “If your credit score is strong, you can take out a personal loan to pay off higher-interest-rate credit cards and pay back the personal loan at a lower rate.”

Unlike 401(k) loans, personal loans require you to submit an application to a bank or lender, undergo a credit check, and pay back the loan with interest. And while employment and income information is verified, you don’t have to worry about staying with an employer, as you do with a 401(k) loan.

401(k) loan vs. personal loan: Which is better?

You need to know the purpose of your loan if you’re trying to decide which option is better: a 401(k) loan versus personal loan.

“Everyone’s situation is different; however, if you’re using 401(k) loans or personal loans to consolidate debt, in most cases a personal loan will be the better option, given a decent credit score,” Sanchez said. “The opportunity cost of tax-deferred growth is just too great when compared to a personal loan and the potential higher-interest-rate payments.”

While personal loans tend to have higher interest rates and shorter repayment terms, borrowing against your retirement is a bigger risk than you might be willing to take.

It might seem tempting to borrow from your 401(k), especially if you need money right away and don’t have a solid credit score to get a personal loan. But even if you have poor credit, you could get a personal loan.

The repayment can vary depending on your employer, but generally, you’re responsible for paying back your 401(k) loan within five years. If you have a medical emergency or other hardship, borrowing from your future self instead of getting a bank loan could work for you. But you might not have enough cash saved in your retirement fund to borrow from it. Keep that in mind as you’re exploring immediate options for a loan.

Be cautious with your choice

Regardless of which kind of loan you decide to take out, review your options carefully. If borrowing against your 401(k) will hurt you financially in the long run, seek other alternatives, such as a personal loan. If you don’t think you can get approved for a personal loan, look for lenders that accept borrowers with cosigners.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal LoansFixed rates from 6.58% APR to 14.87% APR (with AutoPay). Variable rates from 6.275% APR to 12.575% APR (with AutoPay). SoFi rate ranges are current as of July 16, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.275% APR assumes current 1-month LIBOR rate of 2.10% plus 4.175% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.73% – 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
6.28% – 14.87%1$5,000 - $100,000
Check rate nowon SLH's secure site
6.87% – 35.97%*$1,000 - $50,000Visit Upgrade
8.00% – 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
4.99% – 29.99%$10,000 - $35,000Visit FreedomPlus
5.99% – 18.99%2$5,000 - $50,000Visit Citizens
15.49% – 34.49%$2,000 - $25,000Visit LendingPoint
5.99% – 35.89%$1,000 - $40,000Visit LendingClub
5.49% – 18.24%$5,000 - $75,000Visit Earnest
9.95% – 35.99%$2,000 - $35,000Visit Avant
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.