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

How Student Loan Hero Gets Paid

How Student Loan Hero Gets Paid

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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?

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How Student Loan Hero Gets Paid

Student Loan Hero is compensated by companies on this site and this compensation may impact how and where offers appears on this site (such as the order). Student Loan Hero does not include all lenders, savings products, or loan options available in the marketplace.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Student Loan Hero is an advertising-supported comparison service. The site features products from our partners as well as institutions which are not advertising partners. While we make an effort to include the best deals available to the general public, we make no warranty that such information represents all available products.

How Student Loan Hero Gets Paid

How Student Loan Hero Gets Paid

Student Loan Hero is compensated by companies on this site and this compensation may impact how and where offers appears on this site (such as the order). Student Loan Hero does not include all lenders, savings products, or loan options available in the marketplace.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Student Loan Hero is an advertising-supported comparison service. The site features products from our partners as well as institutions which are not advertising partners. While we make an effort to include the best deals available to the general public, we make no warranty that such information represents all available products.

RATES (APR)loan amount
5.99% – 19.16%1 $5,000 to $100,000
7.86% – 35.99% $1,000 to $50,000
5.94% – 35.97%* $1,000 to $50,000
99.00% – 199.00%2 $500 to $4,000
5.99% – 24.99%3 $5,000 to $40,000
7.99% – 29.99%4 $7,500 to $40,000
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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.99% APR to 18.82% APR (with AutoPay). SoFi rate ranges are current as of March 19, 2020 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 creditworthiness, years of professional experience, income and other factors. See APR examples and terms. 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.
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  4. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
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Opploans currently operates in these states: . *Approval may take longer if additional verification documents are requested. Not all loan requests are approved. Approval and loan terms vary based on credit determination and state law. Applications processed and approved before 7:30 p.m. ET Monday-Friday are typically funded the next business day.

  1. To qualify, a borrower must (i) be a U.S. citizen or permanent resident; (ii) reside in a state where OppLoans operates; (iii) have direct deposit; (iv) meet income requirements; (v) be 18 years of age (19 in Alabama); and, (vi) meet verification standards.
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  1. The loan terms presented are not guaranteed and APRs presented are estimates only. To obtain a loan you must submit additional information and documentation and all loans are subject to credit review and our approval process. The range of APRs is 7.99% to 29.99% and your actual APR will depend upon factors including your credit score, usage and history, the requested loan amount, the stated loan purpose, and the term of the requested loan. To qualify for a 7.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available. All loans are made by Cross River Bank and MetaBank®, N.A., Members FDIC.
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Upgrade Bank Disclosures

Personal loans made through Upgrade feature APRs of 5.94%-35.97%. All personal loans have a 2.9% to 8% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Accept your loan offer and your funds will be sent to your bank or designated account within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes the transaction. From the time of approval, funds should be available within four (4) business days. Funds sent directly to pay off your creditors may take up to 2 weeks to clear, depending on the creditor. Personal loans issued by Upgrade’s lending partners. Information on Upgrade’s lending partners can be found at https://www.upgrade.com/lending-partners/.