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 as long as your plan allows this exception. Regardless, you’ll repay yourself with interest—usually via 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 immediately or 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.

Also, keep in mind that 401(k) loans aren’t available to everyone. If you don’t have a 401(k) retirement account or your 401(k) sponsor or company doesn’t offer 401(k) loans, you’ll have to look elsewhere for financing.

A personal loan is a lump sum of money you borrow from a bank, credit union, or online lender with fixed interest and a defined repayment term, which is typically between one year and five years or more.

“Your credit score heavily influences the rate. It’s often used for consolidating debt or covering large expenses,” explained Shafer. Personal loans may be secured and tied to collateral, such as a savings account but in many cases, they’re unsecured and don’t require it.

You can usually apply online and get approved and funded fairly quickly—often within several business days. Plus, some lenders offer additional perks, such as personalized customer service or free credit score monitoring.

In general, 401k loans have a lower interest rate than personal loans, but there’s a caveat: they can slow or stall your retirement savings progress. Also, these loans are paid back in after-tax dollars, which can be a burden on cash flow because it's less money hitting your bank account.

“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, on the other hand, are entirely paid with after-tax dollars. They generally have higher interest rates, but you can expect more flexible repayment terms. Depending on the size of the loan, you may have more than five years to repay it, which could lower the payments but stretch out the debt, leading to higher interest costs overall. Fortunately, personal loans are usually very flexible so you can customize a loan to meet your needs.

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.

A personal loan is almost always a better choice than a 401(k) loan. Not only is it more flexible, it won’t hinder your nest egg or rack up your tax bill. Also, since not all 401(k) plans allow loans, it may not even be an option for you.

With a personal loan, you can access funds without risking your retirement nest egg. Prime credit applicants with stable income may also be able to access more favorable loan terms that keep borrowing costs down.

Plus, there are countless personal loans on the market so you can find a product that aligns with your borrower profile, needs, and personal preferences. You can typically prequalify online and compare your options, without taking a toll on your credit.

If you’re a high earner in search of a smart way to achieve your financial goals, BHG Financial can help. Specifically designed for professionals, our personal loans go up to $250,000¹ with flexible terms of up to 10 years.^1,2 A U.S.-based loan specialist can help you tailor a loan to your specific goals and guide you through the application process.

To get started, check your eligibility online and explore potential loan offers, 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

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?

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.

Which option is cheaper overall?

It depends. 401(k) loans look cheaper on paper, but the true cost is often hidden in lost investment growth and tax penalties if things go sideways. Personal loans carry visible interest, but no impact on retirement savings. Typically, personal loans are the safer, more affordable option in the long -run, especially if you have solid credit and stable income.

Before you go with a 401(k) loan or personal loan, do the math to determine how much it will cost you overall. Then, decide whether it makes financial sense for your particular budget, goals, and lifestyle.