What Is The Interest Rate On A 401k Loan

 

When facing a financial challenge, one funding option many people overlook is borrowing from their retirement account. A 401(k) loan is a way to tap into your own retirement savings to cover short-term expenses. But before using this strategy, it’s important to ask: What is the interest rate on a 401(k) loan, and how does it compare to other borrowing methods?

Understanding the interest rate, loan terms, and potential risks will help you make an informed decision.

Understanding 401(k) Loans

A 401(k) loan allows you to borrow from your own retirement account. Unlike a traditional loan from a bank or credit union, you’re not borrowing from a lender you’re borrowing from yourself. This means the repayment process and interest work differently from other loans.

To access a 401(k) loan, your retirement plan must allow loans. Most plans do, but not all. You’ll need to check with your HR department or plan administrator for specific rules and limits.

What Is the Interest Rate on a 401(k) Loan?

The interest rate on a 401(k) loan is typically based on the prime rate plus 1% to 2%. The prime rate is the interest rate banks charge their most creditworthy customers and is influenced by the Federal Reserve’s benchmark rates. As of mid-2025, the prime rate is around 8.5%, so most 401(k) loan interest rates fall between 9.5% and 10.5%.

This rate is usually fixed at the time you take the loan, meaning it won’t fluctuate during the repayment term. Your specific plan provider will set the exact interest rate.

Why You’re Paying Yourself

Unlike other loans, where the interest goes to a lender, the interest you pay on a 401(k) loan is deposited back into your retirement account. This means you are essentially paying yourself back with interest. For many, this is a major advantage; it helps reduce the “cost” of borrowing.

However, there’s an important downside: the funds you borrow are no longer invested in the market. While you’re repaying the principal and interest, you may miss out on potential investment growth, especially during strong market periods.

Key Loan Terms and Limits

Here are the common rules associated with 401(k) loans:

• Loan Amount: You may borrow up to 50% of your vested 401(k) balance or $50,000, whichever is less.
• Repayment Term: Generally up to 5 years. If you're using the loan to purchase your primary residence, you may be allowed a longer term (up to 15 years in some cases).
• Repayment Method: Payments are made via automatic payroll deductions.
• Early Repayment: Most plans allow early payoff with no penalties.

Comparison With Other Loan Types

Loan Type	Interest Rate Range	Credit Check Required	Interest Paid To
401(k) Loan	9.5% – 10.5%	No	Your own retirement account
Personal Loan	10% – 20%	Yes	Bank or online lender
Credit Card (APR)	20% – 30%	Yes	Credit card issuer
Payday Loan	100%+	No	Payday lender
Home Equity Loan	7% – 10%	Yes	Financial institution

As seen above, 401(k) loans can offer competitive rates, especially for people with low credit scores who can’t qualify for affordable personal loans or credit cards.

Pros of a 401(k) Loan

•  No credit check: Your credit history and score are not factors in the approval process.
•  Lower interest rates than credit cards: Many borrowers use 401(k) loans to pay off higher-interest debt.
•  Fast access to funds: Loans can be processed in a few days.
•   You pay yourself interest: The interest benefits your retirement account, not a lender.

Cons of a 401(k) Loan

• Lost investment growth: Money borrowed from your 401(k) stops earning potential market returns until repaid.
•  Double taxation: You repay the loan with after-tax dollars, and you'll pay taxes again when withdrawing funds in retirement.
•  Repayment risk if you change jobs: If you leave or are terminated, your loan may be due in full within 60–90 days. If not repaid, it’s treated as a distribution, subject to income tax and a 10% early withdrawal penalty (if you're under 59 1⁄2).
•   Lower retirement savings: Repeated borrowing can reduce your retirement nest egg over time.

When a 401(k) Loan Might Make Sense

A 401(k) loan can be useful in situations like:

• Emergency expenses where other financing is unavailable
• Paying down high-interest debt quickly
• Short-term cash flow needs where repayment is certain
• Home purchases (longer repayment period allowed)

However, using this option for non-essential expenses or when unsure about job stability can be financially risky.

How to Check Your 401(k) Loan Interest Rate

To find out your exact rate:

• Log into your 401(k) provider’s website or portal. Most platforms display available loan options and current interest rates.
• Contact your HR or benefits administrator. They can provide detailed information on rates, limits, and eligibility.
• Review your plan’s Summary Plan Description (SPD). This document includes all rules related to loans, repayments, and interest.

Final Thoughts

So, what is the interest rate on a 401 k loan ? In most cases, it ranges from 9.5% to 10.5%, based on the prime rate plus a small margin. While this can be an appealing borrowing option, especially for those with poor credit, it’s important to weigh the risks, especially the loss of retirement growth and potential penalties if not repaid on time.

Always explore alternatives before borrowing from your 401(k), and if you do proceed, borrow only what you need and create a clear plan for repayment. Remember, your 401(k) is meant to secure your future, so borrow from it wisely and cautiously.