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

A 401(k) loan lets you borrow from your own 401(k) retirement plan, typically up to $50,000 or 50% of your vested balance (whichever is less). If 50% of your vested balance is less than $10,000, however, you might be able to borrow up to $10,000 if your plan allows it. Regardless, you repay the loan—with interest—through automatic payroll deductions.

“There’s no credit check with a 401(k) loan, but the most significant risk is job loss. If you leave your job, the loan typically comes due quickly (usually within 30 days), and unpaid balances are treated as taxable distributions with a 10% penalty if you're under 59 1⁄2,” said Dale Shafer, founder and financial advisor at Life Moves Management.

Keep in mind: not all employers offer 401(k) loans. If your plan doesn’t allow it—or you don’t have one—you’ll need another financing option.

Pros and cons of a 401(k) loan

Borrowing from your 401(k) can feel like a convenient solution since you’re using your own money. Still, it comes with tradeoffs that are easy to overlook upfront.

Pros:

• Lower interest rates, with interest paid back into your retirement account through payroll deductions
• No credit check required

Cons:

• Risk of taxes and penalties if you leave your job or can't repay on time (usually within five years)
• Missed investment growth that can reduce your long-term retirement savings

A personal loan is a lump sum of money you borrow from a bank, credit union, or online lender. It comes with a fixed interest rate and a set repayment term, typically one to seven years or longer.

“Your credit score heavily influences the rate. It’s often used for consolidating debt or covering large expenses,” explained Shafer.

Some personal loans are secured and tied to collateral, such as a savings account, but many are unsecured and don’t require it.

You can usually get a personal loan online and receive funds within a few business days, if approved.

Pros and cons of a personal loan

A personal loan offers a more traditional borrowing experience, with potential access to larger loan amounts, structured payments, and no ties to your retirement funds.

Pros:

• Ability to access larger amounts, as many lenders offer access to unsecured personal loans up to $100,000 (up to $250,000¹ through BHG Financial)
• No impact on your retirement savings or investment growth

Cons:

• Interest rates may be higher, depending on your credit profile
• Funding requires a hard credit check, which may cause a small, temporary dip in your score. However, this usually corrects itself within a few months with on-time payments and responsible use.

In general, 401k loans have a lower interest rate than personal loans, but they can slow or stall your retirement savings progress. Because repayments are made with after-tax income, they can also reduce your take-home pay.

“If cash flow is an issue, there may not be enough room to both contribute (pre-tax) and pay back the loan (after-tax). In addition, your money is essentially being double-taxed because the loan is paid back in after-tax dollars, and the money is taxed later when taking distributions in retirement,” said Shafer.

Personal loans, by comparison, are always repaid with after-tax dollars. While rates may be higher for some borrowers, repayment terms are more flexible. Longer loan terms can lower your monthly payment, though they may increase total interest over time. Many lenders, including BHG Financial, offer extended loan terms, which help you customize a loan to your needs and budget.

Here’s a quick glance at how 401(k) loans and personal loans compare:

A 401(k) loan might be worth exploring if you have no other option. For example, it might make sense if you want to avoid foreclosure or bridge the short-term liquidity gap when you’re confident about your employment status.

“In my opinion, a 401(k) loan is a last resort. It can also be a risky way to borrow because the balance of the loan would be due before the tax filing deadline. If you don't repay your balance according to the terms of the loan, it's considered a distribution and is taxed as ordinary income. If you're younger than 59-1⁄2, you also take the 10% early withdrawal penalty,” explained Shafer.

If possible, look into other financing solutions, such as personal loans, home equity lines of credit, HELOCs, and loans from friends and family. In the event you do take out a 401(k), check the IRS website for the most updated information before you sign on the dotted line as rules are subject to change.

Choosing between these two options comes down to how you balance short-term needs with long-term financial goals. Think about your current cash flow, job stability, and how important it is to keep your retirement savings intact.

When should you use a 401(k) loan?

A 401(k) loan may make sense in limited situations—typically when you need funds quickly and don’t have other options. For example, it could help you avoid foreclosure or manage a short-term cash flow gap when your employment situation feels stable.

“In my opinion, a 401(k) loan is a last resort. It can also be a risky way to borrow because the loan balance would be due before the tax filing deadline. If you don't repay your balance in accordance with the loan terms, it's considered a distribution and taxed as ordinary income. If you're younger than 59-1⁄2, you also take the 10% early withdrawal penalty,” explained Shafer.

If possible, consider other options first, such as personal loans, home equity lines of credit, HELOCs, and loans from friends and family. If you do move forward with a 401(k) loan, review IRS guidelines, as rules may change.

When should you use a personal loan?

For most borrowers, a personal loan offers more flexibility with fewer long-term risks. It allows you to access funds without interrupting your retirement savings or triggering tax implications.

Prime credit applicants with stable income may also be able to access more favorable loan terms, which help keep borrowing costs down. You can also tailor the loan to your needs, whether you’re consolidating debt, covering a major expense, or financing a home improvement.

With so many personal loans on the market, it’s easy to find a product that aligns with your borrower profile, needs, and personal preferences. You can typically prequalify for personal loans online and compare your options, without affecting your credit.

You’ve funded your 401(k) for years, but that doesn’t mean you should take a loan out against it. Doing so can interrupt long-term growth and expose you to unnecessary risk if your situation changes. A personal loan through BHG Financial offers a different approach—one that helps you move forward without setting your retirement plan back.

With an unsecured personal loan, you don’t need to navigate withdrawal rules, contribution limits, or potential penalties tied to a 401(k). Instead, you get the financing you need with fixed interest rates, fixed payments, and a set payoff date. Whether you’re exploring debt consolidation loans or financing a major project with a home improvement loan, BHG Financial provides flexible options tailored to high-income professionals.

BHG Financial is best for six-figure earners who want access to large loan amounts without the constraints of a 401(k) loan. Loans are available up to $250,000¹ with terms up to 10 years.^1,2

To get started, check your eligibility online and explore potential loan options, with no impact to your credit.³ If you choose to move forward and formally apply, you can expect a seamless application process and funding in as few as five days.⁴

Is it better to take out a personal loan or a loan from your 401k?

In many cases, a personal loan is the better option because it doesn’t interfere with your retirement savings or introduce tax risks. While a 401(k) loan may offer lower interest, the potential long-term cost to your retirement can outweigh the short-term benefit.

Will a 401(k) loan affect my credit score? 

No. A 401(k) loan will have no impact on your credit score. As long as your 401(k) company offers 401(k) loans, you may take one out without undergoing a hard credit check, which may temporarily lower your credit score by a few points.

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

If you quit, get fired, or leave your job for any other reason before you repay your 401(k) loan, you’ll have to pay back your balance quickly, typically within 30 days. If you’re unable to pay it back, your 401(k) loan may count as a 401(k) withdrawal (when you pull money out of your account before age 59 1⁄2)—leading to taxes and penalties.

Can I borrow more with a personal loan or a 401(k) loan?

Yes. Compared to a 401(k) loan, a personal loan typically offers higher borrowing amounts. While 401(k) loans cap your loan to $50,000 or 50% of your vested balance (whichever is less), many personal loan lenders let you borrow up to $100,000 or even more. BHG personal loans go up to $250,000¹.

Are there taxes or penalties for 401(k) loans?

401(k) loans might come with taxes or penalties. If you leave your job for any reason, the 401(k) loan typically comes due quickly (usually immediately or 30 days) , and your unpaid balance gets treated as taxable distribution with a 10% penalty if you're under the age of 59 1⁄2.