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Whether to borrow from a 401(k) or take out a personal loan is a decision that will depend on your unique financial situation and goals. There are several variables to consider. For instance, a loan from a 401(k) can offer a limited amount of cash and reduce your retirement savings, while a personal loan can offer more cash but can impact your credit score.

Here, learn more about these options for accessing cash so you can make the right decision for your needs.

Understanding 401(k) Loans

Retirement plans such as your 401(k) are designed to tuck away money toward expenses during what are known as your “golden years.” And while you didn’t initially open and contribute to a retirement account to take money out prematurely, if you’re in need of some funds, you might consider a 401(k) loan.

Yes, it’s entirely possible to borrow against your 401(k). While it depends on the specifics of your employer’s plan, you might be able to access up to half of what’s vested in your account, or $50,000, whichever is less. So if you have less than $10,000 vested in your 401(k), you can only take out up to $10,000.

Usually, you’ll have up to five years to pay back your loan amount, along with interest. The interest rate and terms of the repayments depend on your employer’s plan. When you repay the 401(k) loan, the principal and interest go back into your account.

How 401(k) Loans Work

Taking out a loan from your 401(k), or the retirement vehicle known as a 403(b), doesn’t require a credit check, nor does it show up on your credit report as debt. As mentioned, you’re essentially taking out funds from yourself. There’s no third-party lender involved, so there are fewer steps in the application process. Plus, your loan payments go straight into your retirement plan.

The restrictions and requirements can vary according to your employer’s plan, so it’s probably a good idea to talk to a benefits administrator or rep from the retirement account for specifics.

Pros and Cons of Borrowing from Your 401(k)

Looking at the advantages and downsides of borrowing against your 401(k) can help you decide whether a 401(k) loan is the right financing choice for you,

Pros
First, consider the upsides of borrowing from your 401(k) account:

•   Doesn’t require a credit check. Because you’re taking out a loan against yourself and there’s no outside lender involved, a 401(k) loan doesn’t require a hard credit inquiry, so it won’t negatively impact your credit score.

•   Easier to obtain. These loans can be easier to get, and you don’t have to jump through as many hoops (including the credit check mentioned above) as other forms of financing.

•   Lower interest rate. While this hinges on your credit, borrowing against your 401(k) often comes with a lower interest rate than other financing options, such as taking out what’s known as a personal loan or using your credit card. This means it can cost you less in interest.

Usually, the interest rate is the prime rate, plus 1% to 2%. As of August 2024, the prime rate is 8.50%, so you’re looking at a 9.50% to 10.50% interest rate.

•   Won’t show up on your credit report. Another plus of a 401(k) loan is that it doesn’t show up on your report as a form of debt, so you won’t have to worry about your payment history impacting your credit in any form.

•   No penalties or taxes. As long as you don’t default on the loan, you won’t have to pay taxes and early withdrawal penalties that come with making early 401(k) distributions. (This is a benefit vs. taking a 401(k) distribution, which will trigger taxes and possibly penalty fees if you are under age 59½.)

•   Interest goes back to you. While you have to pay interest on your 401(k) loan, that money goes into your retirement account.

Cons
Now, review the potential downsides of taking out a 401(k) loan:

•   Not all 401(k) plans allow loans. Many plans do offer the ability to take out a 401(k) loan, but not all of them. Check with your plan administrator to learn whether this is even a possibility for you before planning on getting funds via this method.

•   You might have to pay back the loan right away. Should you lose your job or change workplaces, you might be required to pay the remaining balance on your loan quickly. That can be a tall order, especially after a major financial blow such as a job loss.

•   Smaller retirement fund. When you take money out of your retirement plan, that means losing out on the money in an account designated for your nest egg. Because the clock will be set back, it will take you longer to hit your retirement savings goals.

•   Missing out on potential earnings. Plus, you’re losing out on any potential growth on that money if it were sitting in your 401(k) account instead. While you are paying yourself interest on the loan, the earnings on your returns could be more than the interest.

•   Possibility of taxes and penalties. If you don’t pay back your debt in a timely manner, you could owe taxes and penalty fees on it. That’s because it becomes a 401(k) distribution vs. a loan if you don’t keep up with your payments.

•   Lower loan amounts. How much you can borrow from a 401(k) account has limits. Currently, those are $50,000 or 50% of your vested account balance, whichever amount is less. That may or may not suit your needs.

•   Longer funding times. The funding time can take up to two weeks or longer in some cases.

Overview of Personal Loans

Personal loans are a type of installment loan where you’re approved for a certain loan amount and receive the entire amount upfront. Personal loan amounts vary from $1,000 to $100,000 (some large personal loan amounts go even higher), but the exact amount depends on your approval.

You’re responsible for paying off the personal loan during the repayment term, which is usually anywhere between one and seven years. The time you have to pay off the loan depends on the lender and the specifics of your loan.

Personal loans also come with interest (typically but not always a fixed rate). Your rate depends on factors such as the lender, your credit score, debt-to-income ratio (or DTI), and other aspects of your finances. The national average for a 24-month personal loan as of May 2024 is 11.92%.

Types of Personal Loans

There are different types of personal loans to learn about so you can decide which one might be best for you:

•   Secured personal loans. Secured personal loans are loans that are backed up by an asset, such as a car, home, or other valuable property. Should you fall behind on your payments, the lender can seize your collateral to recoup the money. While you risk a valuable asset, secured loans usually have lower credit score requirements and other less stringent financial qualifications. Plus, you can get a higher amount than with unsecured personal loans.

•   Unsecured personal loans. Unsecured personal loans are loans that don’t require any collateral to secure. They usually have higher credit score requirements and more strict approval criteria than their secured loan counterparts. Unsecured vs. secured personal loans usually have lower amounts available.

•   Fixed-rate personal loan. A fixed-rate personal loan can be unsecured or secured. The interest is the same throughout your loan term, which makes for predictable monthly payments.

•   Variable-rate personal loan. A loan with a variable vs. fixed interest rate, however, can see the interest charges go up and down throughout your repayment term. This means the amount you’ll end up paying in interest on the loan is unknown. Plus, budgeting might be harder, as your monthly payments could change.

Personal loans offer a lot of flexibility. You can use them for various purposes, from funding a major home improvement project to making a big-ticket purchase to financing a wedding or vacation. In some cases, personal loans are geared toward specific purposes:

•   Home improvement loans. A home improvement loan is an unsecured personal loan that can be used for repairs on normal wear and tear, general maintenance, or toward a renovation project.

•   Debt consolidation loans. Debt consolidation loans are used to take multiple loans and lump them together into a new, single personal loan. The main benefits are that debt consolidation loans can potentially lower your interest rate or monthly payment, or both.

Advantages and Disadvantages of Personal Loans

Next, take a look at the pluses and minuses of personal loans:

Pros

•   Quicker access to funding. You might be able to tap into the funds of your personal loan as fast as within 24 hours of approval. So, if you need money in a flash, this could be a good option for you.

•   Flexible amounts and repayment terms. Unlike 401(k) loans, where there’s a borrowing limit of $50,000 and a repayment term of five years, there’s a wide range of borrowing amounts and repayment periods. You’ll likely have a better chance of finding a personal loan that’s a good fit for your time frame vs. with a personal loan.

•   It can accrue lower interest than other financing options. The interest rate of a personal loan can range from 8% to 36%, and the average rate stands at 12.38% as of August 2024. While it might not be lower than the 401(k) loan rate, personal loan rates can be lower than using a credit card or payday loan to make purchases.

Cons

•   Impacts your credit score. When you take out a personal loan, the lender needs to do a hard pull on your credit. This usually reduces your credit score by a few points and will impact your score for up to a year.

Also, since your payments are reported to the credit bureaus, if you fail to keep up with payments, your score could be dinged.

Taking on a loan also drives up your credit utilization, which also can negatively impact your score.

•   Fees and penalties. Some personal loans have origination fees, which can add to your loan amount and your debt. Plus, you might incur late fees. On the flip side, the lender could charge a prepayment penalty if you’re ahead of schedule on your payments. This is to recoup any losses they would’ve earned on the interest.

•   Additional debt. While a 401(k) loan is an additional financial responsibility, personal loan debt means making payments and owing interest that doesn’t go back to you. Instead, you’ll be on the hook for payments until the loan is paid off.

Recommended: Personal Loan Calculator

Key Comparison Factors

Here are key factors to compare when evaluating taking out a personal loan vs. a 401(k) loan:

•   Interest rate. The higher the interest rate, the more you’ll pay for the same amount of borrowed money.

•   Repayment term. The shorter the repayment term, the higher the payments. On the other hand, the longer the repayment term, the lower the payments (but you’re likely to pay more interest over the life of the loan).

•   Impact on retirement savings. You’ll want to weigh the different ways a loan can eat into your retirement goals. For example, a 401(k) loan will shrink your retirement fund. However, if you take out a personal loan, you may have less cash available to put toward retirement since you need to make your monthly payments.

•   Credit score implications. Understanding how taking out either loan can impact your credit score is important, especially if you are building your credit score. A 401(k) loan doesn’t require a hard credit pull nor will payments show up on your credit report. A personal loan, however, does require a hard credit inquiry, and late payments will end up on your credit file and can lower your score.

•   Tax considerations. If and when you’ll be taxed is also something to consider. As for whether a personal loan is taxable, the answer is usually no. But a 401(k) loan could be taxable if you fail to meet certain loan requirements, such as sticking to your repayment schedule.

Scenarios: When to Choose Each Option

If you are contemplating the choice between taking a 401(k) loan or a personal loan, reviewing these scenarios could help you make your decision.

401(k) loan: Going with a 401(k) loan might make more financial sense in these scenarios:

•   You’re far off from retirement. You likely have time to pay back the loan and replenish your account, which can help you hit your target amounts within your desired time frame.

•   Time frame and loan amount are also important considerations: You’ll want to ensure you can repay your loan within five years. If you fall behind, the amount you owe can be treated as a distribution – and you’ll be hit with early withdrawal penalties and taxes.

•   A 401(k) loan can also be a wise move if your credit score doesn’t qualify you for a personal loan with favorable terms. A hard credit inquiry isn’t part of tapping funds from this kind of retirement savings.

Personal loan: A personal loan might be the stronger choice in these situations:

•   If you want quicker access to the funds, a personal loan could be a good bet as you may be able to apply, be approved, and access funds within just a few days. A 401(k) loan can take a few weeks to move funds into your bank account. You will, of course, need to meet the lender’s criteria, such as minimum credit score and debt-to-income requirements.

•   A 401(k) loan also might be a better route if you can stomach another form of debt (since you are, in a sense, borrowing from yourself and not a lender) and feel confident you can stay on top of your payments.

•   A personal loan can also be a good move if you are hoping to borrow more than the $50,000 cap on 401(k) loans. A personal loan may allow you to access twice that amount.

•   If you feel you might be changing jobs soon or that your job is in jeopardy, a personal loan could be a better option than a 401(k) loan. If you leave or lose your job, a 401(k) loan could be due in less than the five-year term.

With either option, you want to make sure you have a steady income to repay the loan. It’s important to prioritize paying off the loan. Otherwise, you’ll get hit with potential fees and/or damage to your credit score.

Long-Term Financial Impact

Borrowing from a 401k vs a personal loan can have a different long-term impact on your money situation. In deciding between the two, you’ll want to take a close look at the following:

Effect on retirement savings. Taking out a 401(k) means a smaller retirement fund, potentially a loss in growth in your investments, and also potentially a setback on your retirement goals.
While a personal loan doesn’t have the same impact on your retirement savings, having less money freed up each month can mean you’ll have less to contribute to a tax-advantaged retirement account.

Potential opportunity costs. Taking on more debt, whether against your retirement account or a loan through a lender, means your money will be tied up in debt repayments. In turn, you might miss out on opportunities to boost your finances, whether that’s putting money toward education, a business venture, your savings, or an investment account.

Debt management considerations. With a 401(k) loan, you’ll want to feel comfortable that you can shore up your retirement funds by paying off the amount within five years. You’ll be required to make payments at least once a quarter. With a personal loan, the monthly payment and repayment term can vary, but you’ll want to make sure both are a good fit for your budget and goals.

The Takeaway

In deciding whether to borrow a 401(k) loan or a personal loan, you’ll want to understand the basics of how each works, their respective advantages and disadvantages, and what factors to consider before landing on the best choice for you. A 401(k) loan can avoid the potential negative credit impact of a personal loan, for instance, but there is a limit to how much you can borrow, which could sway your decision.

If you’re curious about personal loans, see what SoFi offers.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What happens to my 401(k) loan if I leave my job?

If you leave or experience a job loss, you might be required to pay back the remaining balance on your 401(k) quickly.

Can I take out multiple 401(k) loans?

Most plans only allow you to have one 401(k) at a time, and you must pay it back before you can take out another one. However, it’s worthwhile to check with your plan administrator, as you might be allowed to take more than one, as long as the total between the two doesn’t go over the plan’s limit, which is typically $50,000.

How does each option affect my credit score?

A 401(k) loan doesn’t require a hard pull of your credit, nor do your payments show up on your credit report. It therefore doesn’t affect your credit score. A personal loan does trigger a hard credit inquiry, and late or missed payments on your personal loan can negatively impact your score. Plus, taking on a personal loan increases your credit utilization ratio, which can also lower your score.

Photo credit: iStock/JulPo

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q324-014

When you’re facing $100,000 in student loan debt, you may wonder if you’ll ever be able to pay it all off. To make it even more daunting, you’re probably facing tens of thousands of dollars in interest charges.

Fortunately, there are a number of strategies to make your payments manageable and more affordable. Learn how to pay off 100K in student loans and find the repayment option that’s best for you.

Understanding Your $100,000 Student Loan Debt

According to the Education Data Initiative, 8% of borrowers owe more than $100,000 in student loan debt. As the interest continues to build on the loan, you’ll owe even more than $100,000 over time. That’s what makes living with student loan debt so challenging.

For example, if you have a $100,000 loan balance with a 7% interest rate and a 10-year repayment term, you’ll owe $39,330 in interest payments over the life of the loan. So your $100,000 loan becomes $139,330, with monthly payments of $1,161.

The longer you take to pay off your $100,000 in student loans, the more you’ll pay. But of course, your payments also need to fit into your budget each month, along with your rent, utilities, and other necessities.

Breaking Down Federal and Private Loans

There are key differences between federal and private student loans that can affect how you repay what you owe. Federal student loans come from the Department of Education, while private student loans are offered by private institutions like banks, credit unions, and online lenders.

Federal student loans have fixed interest rates, flexible repayment options, and federal protections and programs such as income-driven repayment plans and loan forgiveness.

Private student loans are often used to help fill the gap that federal loans, scholarships, and other financial aid doesn’t cover. These loans may have fixed or variable interest rates, and they often require a cosigner. Private student loans don’t offer the same flexible repayment options or federal programs that federal student loans do.

Check to see what kinds of loans you have. You may have federal student loans only or a combination of federal and private student loans. Knowing exactly what your loans are will help you determine the best way to tackle your debt.

Recommended: Student Loan Debt Guide

Calculating Interest and Total Repayment Costs

Once you’ve identified the kinds of student loans you have, calculate how much your total repayment cost, including interest, will be based on the loan term of your current repayment plan. With federal student loans, unless you pick another plan, you will automatically be placed on the 10-year Standard Plan.

You can check with your student loan service provider to get your total student loan costs. You can also use a student loan calculator or calculate it yourself.

To determine how much the monthly simple interest on your loan will be, you first need to calculate the daily interest on the loan. To do this, divide the loan’s interest rate by 365 and multiply that number by the principal amount. Then multiply the resulting number by the number of days in your billing cycle.

On a $100,000 loan with an interest rate of 6.00% and a repayment term of 10 years, your monthly payment would be $1,110.21, and $276.88 of that would be interest.

That adds up to $33,224.60 in interest over the life of the loan, giving you a total loan repayment cost of $133,224.60.

Creating a Budget and Repayment Plan

To start paying off $100,000 in student loans, it helps to create a budget. You might consider using a popular budgeting technique such as the 50/30/20 rule, which allocates 50% of your income toward needs (housing, utilities, bills), 30% toward wants (nonessential items like dining out and entertainment), and 20% toward savings and investments. You may decide to forgo a big chunk of the wants and direct that extra money into paying off your student loans.

Once you’ve set up a budget, evaluate your loan repayment options. The Standard Plan with its 10-year repayment term might not be the best choice for you, especially if the monthly payments are too steep. Instead, you may want to consider income-driven repayment (IDR) plans. These plans are designed for borrowers who have a high debt relative to their income.

With income-driven repayment, your monthly payment amount is based on your income and family size. Your loan term will be approximately twice as long as on the Standard Plan. However, the longer loan term means you will pay more interest over time.

Exploring Loan Consolidation and Refinancing

Student loan consolidation and refinancing are two other possible options to help manage student loan debt.

Consolidating Federal Student Loans

When you have multiple federal student loans, you can consolidate them into a new federal Direct Consolidation Loan. With this loan, you can choose more flexible loan terms, like a longer time to repay the loan. You’ll also simplify your payments. Instead of making several different loan payments, with consolidation you make just one payment.

Refinancing with Private Lenders

When you refinance your student loans, you replace your current loans with a new loan from a private lender. Ideally, you might be able to qualify for better rates and terms.

It’s possible to refinance private student loans, federal student loans, or a combination of both types. However, if you refinance your federal student loans into private loans, you’ll lose access to the federal programs and protections those loans offer, such as deferment, forbearance, forgiveness, and income-driven repayment plans.

Recommended: Private Student Loans Guide

Weighing the Pros and Cons

There are benefits and drawbacks to refinancing and consolidating your student loans. Here are the pros and cons of each option.

Pros of federal student loan consolidation:

•   Simplified payments.You’ll have a single monthly loan payment, rather than multiple payments.

•   Lower monthly payment. You might be able to get a lower monthly payment, but that means you’ll make more payments over a longer term.

•   Longer loan term. Consolidation gives you the flexibility to choose a lengthier loan term.

Cons of federal student loan consolidation:

•   Consolidation may result in more payments and interest over time if you extend your loan term.

•   With consolidation you might lose certain benefits such as interest rate discounts, principal rebates, and loan cancellation benefits.

•   A longer loan term could mean you’ll be making payments for years longer than your original term.

•   Consolidating your loans might cause you to lose credit for payments made toward income-driven repayment plan forgiveness.

Refinancing student loans also has advantages and disadvantages.

Pros of student loan refinancing:

•   You may get a lower interest rate. If you qualify for a lower interest rate, you could save money. A student loan refinancing calculator can help you determine what you might save.

•   You might qualify for better terms. You may be able to extend the length of your loan, which could lower your monthly payment.

•   Simplified payments. With refinancing, you only have one payment each month, rather than multiple loan payments.

Cons of student loan refinancing:

•   You’ll lose federal protections and programs. When you refinance your student loans with a private lender, you lose all federal benefits and protections, including deferment and forbearance.

•   No access to income-driven repayment plans. IDR plans are another thing you give up with refinancing.

Utilizing Repayment Assistance Programs

Loan repayment assistance programs (LRAPs) are another resource that could help you manage your student debt. States, employers, and other organizations may offer these programs that can help you repay your student loans.

Do some research to find out if there are any LRAPs you might qualify for — for instance, some are offered to college grads that work in public service fields — and check with your employer to find out if they offer such a program.

Strategies for Accelerating Loan Repayment

There are several different strategies for repaying your student loans faster, which could help you save money over the long term. Here are some options to consider.

•   Start paying off your loans sooner. If possible, make student loan payments while you’re still in school or during the six-month grace period after graduation. If you can’t afford to make full payments, pay off enough to cover the interest each month and keep it from accruing.

•   Sign up for automatic payments. Making your loan payments automatic will ensure that they’re made on time, and prevent any late penalty charges. Plus, you may get an interest rate deduction for enrolling in an automatic payment program.

•   Pay a little extra each month. Paying more than the minimum on your loan can help you pay off the loan faster. It can also reduce the amount of interest you’ll pay.

•   Put any extra money toward your loans. Use a windfall, a tax refund, or birthday money from family members to help pay off your student loan.

•   Consider student loan refinancing. With refinancing you may be able to qualify for a lower interest rate or a shorter loan term.

The Takeaway

A student loan debt of $100,000 might seem daunting, but there are ways to repay your loans that might also save you money or allow you to pay off your loans faster. Options include income-driven repayment plans, putting additional money toward your loan payments each month, loan consolidation, or student loan refinancing. Weigh the pros and cons of the different options to decide which one is best for you.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

How long will it take to pay off 100K in student loans?

The length of time it will take to pay off $100K in student loans depends on a variety of factors, including the repayment plan you choose and whether or not you regularly make extra payments toward your student loans each month. For instance, if you’re on the Standard Repayment plan for federal student loans and you don’t make additional payments on your loans, it will typically take you 10 years to pay off your loans. If you opt for an income-driven repayment plan, your loan repayment term will generally be 20 years or longer.

Can I settle student loan debt for less than I owe?

It’s difficult to settle student loan debt for less than you owe. However, if you find yourself in very dire circumstances and your loans are in default, you may be able to get a student loan settlement. That means you pay off your student loans for less than you owe typically in one lump sum, depending on the settlement terms. Your lender must be willing to work with you in order to qualify for a student loan settlement. Check with your loan servicer for more information.

What happens if I can’t make my student loan payments?

If you can’t make your student loan payments, reach out to your lender or loan servicer right away to let them know you’re struggling. They will explain the options you have, which might include income-driven repayment plans, forbearance, or deferment. It’s important to reach out to the lender or loan servicer immediately because if you miss payments, they may report the missed payments to the credit reporting agencies, which can hurt your credit.

Photo credit: iStock/damircudic

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.