Calculate your 401k loan payment, total interest, and see how borrowing affects your retirement savings. Enter loan amount, interest rate, and term.
Manageable cost — ~$1,716 in net lost growth
You'll pay $205.17/mo for 5 years, totaling $12,310. The $2,310 in interest goes back into your 401k, but you'll miss an estimated $4,026 in market gains while the money is out of your account.
Moderate opportunity cost of $4,026
Your $10,000 could grow to $14,026 over 5 years at 7% return. But since the $2,310 in interest goes back to your account, the real cost is a more modest $1,716.
35% of your first payment is interest
In month 1, 35% of your $205.17 payment covers interest — the rest reduces your balance. Over the full term, interest makes up 19% of total payments ($2,310 of $12,310). Unlike other loans, all that interest goes back into your 401k.
Payment = P × [r(1+r)ⁿ] / [(1+r)ⁿ - 1]. Max loan is lesser of $50,000 or 50% of vested balance.
A 401k loan lets you borrow money from your own retirement account. Unlike a bank loan, you're borrowing from yourself. The interest you pay goes back into your account, not to a lender.
Most 401k plans allow loans, but not all. Check with your plan administrator to see if your plan offers this option.
When you take a 401k loan, your employer deducts payments directly from your paycheck. This happens automatically, so you can't miss a payment as long as you stay employed.
The payment formula is the same as any amortized loan:
Where:
The IRS sets strict rules for 401k loans:
You can borrow the lesser of:
If your vested balance is 40,000 (50%). If your balance is 50,000 (the IRS cap).
You cannot extend a general loan beyond 5 years under any circumstances.
Plans typically charge the prime rate plus 1-2%. As of 2024-2025, this means rates around 8-10%. The good news: this interest goes back into your own account.
Payments must be "substantially level" and made at least quarterly. Most plans use payroll deduction for every pay period.
Let's walk through an example:
Loan details:
Step 1: Convert annual rate to monthly
Step 2: Calculate the payment
Step 3: Calculate total cost
The interest you pay goes back to your account. But there's a bigger cost most people miss: opportunity cost.
When you borrow from your 401k, that money is no longer invested in the market. If the market returns 7% annually while you're repaying an 8.5% loan, you might think you're ahead. But let's look closer.
Example: $15,000 loan for 5 years
If that $15,000 stayed invested at 7% annual return:
With the loan:
This opportunity cost is real money you won't have at retirement.
Despite the costs, a 401k loan can be a good choice in certain situations:
If you're paying 20-25% on credit cards, a 401k loan at 8-9% can save you money. Calculate both scenarios to be sure.
For a temporary cash crunch with a clear payoff plan, a 401k loan beats most alternatives. You'll repay yourself, not a bank.
401k loans don't check your credit score. If your credit is poor, this may be your only option for a reasonable rate.
Primary residence loans get extended terms (15+ years) and can help you avoid PMI by putting down more.
If you leave your job (voluntarily or not), most plans require full repayment within 60-90 days. If you can't repay, the outstanding balance becomes a taxable distribution plus a 10% penalty if you're under 59½.
You need that money growing. Taking a loan in your 50s could significantly reduce your retirement funds.
Vacations, cars, and other depreciating assets aren't worth borrowing retirement money for.
Some plans restrict your ability to contribute while you have an outstanding loan. This compounds the cost by missing out on employer matches.
| Option | Interest rate | Credit check | Tax deductible | Risk |
|---|---|---|---|---|
| 401k loan | 8-10% | No | No | Job loss |
| Personal loan | 10-20% | Yes | No | Credit score |
| Home equity | 7-9% | Yes | Maybe | Home as collateral |
| Credit card | 20-30% | Yes | No | Debt spiral |
| 401k withdrawal | N/A | No | No | Taxes + 10% penalty |
A 401k loan often beats other unsecured options on rate, but comes with unique risks.
If you default on a 401k loan, the IRS treats the outstanding balance as a distribution:
Example: $10,000 default at age 45 in the 22% federal bracket:
You may have heard that 401k loans cause "double taxation." Here's the truth:
The claim: You repay with after-tax dollars, then pay tax again at withdrawal.
The reality: This is only partially true. The principal wasn't double-taxed—only the interest portion. And you'd pay tax on any 401k money eventually anyway.
The interest amount is relatively small, and the double-taxation effect is much smaller than often claimed.
If your plan allows, keep contributing at least enough to get the full employer match. Don't sacrifice free money.
Having 3-6 months of expenses saved reduces the chance you'll need another loan or face default during job loss.
Most plans allow extra payments. Paying off early reduces opportunity cost and frees up cash flow.
Payroll deduction is automatic, but if you leave your job, set up manual payments immediately to avoid default.
Shorter terms mean higher payments but less total cost:
| Loan amount | Term | Monthly payment | Total interest | Opportunity cost |
|---|---|---|---|---|
| $10,000 | 3 years | $315 | $1,330 | $2,250 |
| $10,000 | 5 years | $206 | $2,336 | $4,026 |
| $20,000 | 3 years | $630 | $2,660 | $4,500 |
| $20,000 | 5 years | $412 | $4,672 | $8,051 |
Assumes 8.5% loan rate and 7% market return
Choose the shortest term you can comfortably afford.
Some plans now offer online applications with same-day approval.
Unlike a 401k withdrawal, a loan is not a taxable event—as long as you follow the rules:
If you follow the rules, you pay no tax on the loan itself. You only pay tax when you eventually withdraw funds in retirement (like normal 401k distributions).
Some plans allow multiple loans, but total outstanding balance can't exceed the $50,000 or 50% limit. Each loan has its own repayment schedule.
No. 401k loans don't appear on credit reports and don't require a credit check. They have no impact on your credit score.
No. Unlike mortgage interest, 401k loan interest is not tax-deductible.
You typically have 60-90 days to repay the full balance. Some plans allow you to continue payments from a bank account. Check your specific plan rules.
Yes. There are no prepayment penalties on 401k loans. Paying early reduces your opportunity cost.
Plans set their own rules. Some allow new loans immediately after repaying one; others require a waiting period.
Before borrowing from your 401k, explore these options:
Roth IRA contributions: You can withdraw Roth IRA contributions (not earnings) tax-free and penalty-free at any time.
0% APR credit cards: If you can pay off the balance within the promotional period, this costs nothing.
Personal line of credit: Often lower rates than credit cards if you have good credit.
Negotiate with creditors: If you're behind on bills, many creditors will work out payment plans.
Side income: A temporary second job or gig work keeps your retirement intact.
A 401k loan should be a last resort, not a first choice. But when you need it, understanding the true costs helps you make the best decision for your financial future.