How Can I Get a Loan from My 401(k)?

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If you need a loan, one way to get it without having to meet a lender's high credit standards is to request a loan from your 401(k). Once you request the money, you enter a plan to pay it back, much like a traditional loan--except that you don't have a lender. You're really paying back your retirement accounts when you make payments to the 401(k) fund from which you've borrowed. 401(k) loans are not available on every 401(k) plan, and repayment periods are short, generally five years or less.

Pros

  • 401(k) loans are the easiest loans you can get. You don't have to pass a credit check and the process is extremely simple. You'll generally have an interest rate about 5 percent, depending on your 401(k) plan, and all the interest you pay when repaying the loan is added to your 401(k) principal. The money is distributed quickly and, depending on the size of your 401(k), you can get a large sum.

Cons

  • You're taxed twice on the money that you repay to the 401(k), because you're not repaying a lender, you're repaying yourself. A common way to repay 401(k) loans is to stop plan contributions, which can slow down the growth of your 401k and may also stop company match contributions. You take home less money repaying the loans than you do when you're only contributing to your 401(k), because the repayments are made with after-tax money. You can't deduct the interest you pay on your 401(k) on your taxes, since the money is being paid back to yourself.

Eligibility

  • You have to have money in your 401(k) to borrow from it. Usually you can take out either 50 percent or $50,000, whichever is less. If you have a 401(k) loan outstanding when you request the new loan, you won't be able to borrow. There is no credit check with 401(k) loans.

Process

  • The process varies, depending on where you work. Contact your human resources department or your 401(k) plan administrator and explain that you're interested in borrowing against your 401(k). Ask what the current interest rates are. Your company might need you to fill out a form, sign it and mail it in--but sometimes you can get the loan just by calling and requesting it.

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