To take a 401(k) loan, you log into your plan provider’s website, submit a loan request specifying the amount and repayment term, and wait for the funds to arrive, typically within about 10 business days. Not every 401(k) plan allows loans, so your first step is checking whether yours does. Here’s what you need to know about eligibility, limits, costs, and the repayment process.
Check Whether Your Plan Allows Loans
Employers aren’t required to offer loans in their 401(k) plans. Some do, some don’t. The quickest way to find out is to log into your retirement account through your plan provider (Fidelity, Vanguard, Schwab, TIAA, or whoever administers your plan) and look for a “Loans” or “Withdrawals & Rollovers” section. If you don’t see a loan option, your plan doesn’t offer one.
You also need to be actively employed with the company sponsoring the plan. If you’ve left the job for any reason, you can no longer borrow from that employer’s 401(k), even if loans were available while you worked there.
How Much You Can Borrow
Federal rules cap 401(k) loans at 50% of your vested account balance or $50,000, whichever is less. So if your vested balance is $80,000, you could borrow up to $40,000. If it’s $120,000 or more, the cap stays at $50,000.
There’s one small exception: if 50% of your vested balance comes out to less than $10,000, some plans let you borrow up to $10,000 anyway. Not all plans include this provision, though. Most plans also set a minimum loan amount, commonly $1,000.
“Vested” is the key word here. If your employer makes matching contributions that vest over a schedule (say, 25% per year over four years), only the portion you’ve earned counts toward your borrowing limit. Your own contributions are always 100% vested.
Steps to Request the Loan
The process is mostly self-service through your plan provider’s portal. While the exact screens vary by provider, the steps follow the same general pattern:
- Log in to your account and navigate to the loans or withdrawals section.
- Select “Request a Loan” (or similar wording) and choose the loan type. Plans typically distinguish between general-purpose loans and home-purchase loans, which have different repayment timelines.
- Enter the loan amount you want, anywhere from the plan minimum up to your borrowing limit.
- Choose a repayment term. General-purpose loans must be repaid within five years. Loans used to buy a primary residence can stretch longer, often up to 15 or even 30 years depending on the plan.
- Select how you want to receive the money: direct deposit to your bank account or a mailed check. Some providers offer expedited delivery for an extra fee.
- Submit your request. The plan administrator reviews your eligibility, confirms the plan allows loans, and may request spousal consent if the plan requires it.
After approval, the provider sells enough of your investments to generate the cash. This trade settlement plus payment processing means you should expect to receive funds in roughly 7 to 10 business days from submission. Direct deposit is faster than waiting for a paper check.
Interest Rates and Fees
Unlike a bank loan, the interest you pay on a 401(k) loan goes back into your own account. That sounds like a free lunch, but it’s not quite. The money you borrowed is no longer invested in the market, so you lose whatever growth those funds would have earned during the loan period.
The interest rate is typically set at the prime rate plus 1%. With the prime rate currently around 7.5%, that puts most 401(k) loan rates in the neighborhood of 8.5%. Your plan locks in the rate when the loan is issued, and it stays fixed for the life of the loan.
On top of interest, expect fees. Origination fees commonly run $75 to $175, depending on the provider and loan type. Some providers also charge an ongoing servicing fee, often $50 to $75 per year, billed quarterly. These fees are usually deducted from the loan proceeds, so if you request $10,000 and there’s a $75 origination fee, you’ll receive $9,925.
How Repayment Works
Repayments happen automatically through payroll deduction. Each pay period, your employer withholds the loan payment and sends it to your 401(k) account along with your regular contributions. You don’t write a check or set up a separate payment. The repayment schedule is tied to your pay frequency, so if you’re paid biweekly, you’ll make 26 payments per year.
Payments are made with after-tax dollars. This is worth understanding because your original 401(k) contributions were pre-tax. When you eventually withdraw those repaid dollars in retirement, they’ll be taxed again. You’re effectively paying tax twice on the portion of your balance that went through a loan and came back.
What Happens If You Leave Your Job
This is where 401(k) loans get risky. If you quit, get laid off, or are fired while you still have an outstanding loan balance, the full remaining amount typically becomes due by the tax-filing deadline for that year (including extensions). Some plans give a shorter window.
If you can’t repay the balance by that deadline, the outstanding amount is treated as a distribution. That means you’ll owe income tax on it, and if you’re under 59½, you’ll also owe a 10% early withdrawal penalty. On a $20,000 unpaid balance, that could mean $5,000 or more in taxes and penalties, depending on your bracket.
Before borrowing, think honestly about your job stability. A 401(k) loan is safest when you’re confident you’ll stay with your employer long enough to pay it off.
How the Loan Affects Your Retirement Savings
The biggest cost of a 401(k) loan isn’t the interest or the fees. It’s the investment growth you miss while your money is out of the market. If the stock market returns 8% over three years and your $15,000 is sitting in a loan instead of invested, you’ve lost roughly $3,600 in potential growth, compounding effects included.
There’s also a behavioral risk. Some borrowers reduce or stop their regular 401(k) contributions while repaying the loan because payroll deductions for both can squeeze take-home pay. That compounds the long-term cost. If your employer matches contributions and you cut back, you’re also leaving free money on the table.
A 401(k) loan can still make sense in certain situations, particularly when the alternative is high-interest credit card debt or a personal loan with a rate well above what your 401(k) charges. Just make sure you run the numbers with a clear understanding of what you’re giving up in future growth, not just what you’re paying in interest today.