Pros
- The interest rate is generally lower than you’ll find on credit cards or personal loans, and the interest you pay goes back into your retirement account, where it grows tax-deferred (and possibly tax-free if it’s a Roth 401(k) plan).
- Since the loan is secured by your retirement savings, there’s no need for the lender to do a credit check.
- If your employer lets you borrow from your 401(k), the process is relatively quick. You’ll need to fill out an application, but there’s no waiting period or credit check required.
- Unlike personal loans, 401(k) loans don’t come with origination fees or prepayment penalties.
Cons
- 401(k) loans must be repaid within five years (unless you leave your job). If you leave your job for any reason, the loan will typically be due in full within 60 days. If you can’t pay, it will be considered an early distribution and taxed as income. You’ll also owe a 10 percent penalty if you’re younger than 59½. It’s important that you make payments on time every month. If not, the loan will go into default.