With a 401(k) Loan, you can access the money you’ve set aside for retirement in a 401(k) account. This makes it a little different from a standard loan since you’re borrowing your own money that you’ve saved. Additionally, the interest payments you’ll make while paying back the loan will go into your 401(k) account.

However, keep in mind that getting a 401(k) loan could affect your overall retirement savings.

Here’s what you should know about 401(k) loans:

• 401(k) loan rules
• How coronavirus has affected 401(k) loans
• 401(k) loans: Pros and cons
• 401(k) loans vs. personal loans
• Other alternatives to a 401(k) loan
• Compare multiple options before borrowing from retirement savings

401(k) loan rules

There are a few specific rules that govern 401(k) loans, including:

• Maximum loan amount: Borrowers can’t take more than 50% of their vested account balance or $50,000, whichever is less. However, this 50% rule is waived for account holders with a vested account balance of $10,000 or less — in this case, you can borrow up to $10,000.
• Repayment term: You’ll generally have to repay the loan within five years as well as make payments on at least a quarterly basis. However, this five-year rule can be waived if you’re using the money to buy a primary residence.
• Interest rate: The interest rate on a 401(k) loan is usually a certain percentage over the prime rate. For example, if the interest rate is 1% over the prime rate — which is set at 3.25% as of April 2021 — your rate on a 401(k) loan would be 4.25%. If you took out a 401(k) loan for $50,000 and repaid it over five years, you’d pay $5,589 in interest.
• Payments: You’ll make fixed payments over the term of a 401(k) loan.
• Employment requirements: If you stop working for the employer sponsoring your 401(k) plan before you’ve paid off the loan, you’ll typically have to repay the loan in full by the time your next federal tax return is due. Otherwise, your 401(k) loan will generally be considered an early withdrawal, which means you’ll have to pay federal income tax on the withdrawal amount plus a 10% penalty.

Learn More: Where to Get a Personal Loan

How coronavirus has affected 401(k) loans

The CARES Act, which was signed into law on March 27, 2020, made some changes to 401(k) loan options that were only in effect for the 2020 calendar year.

Borrowers negatively impacted by the COVID-19 pandemic were eligible for certain benefits on 401(k) loans, including:

• Maximum loan amount: Qualified borrowers could take up to 100% or $100,000 of the vested balance — whichever was less — through Sept. 22, 2020.
• Repayment term: Borrowers who took out a loan on or after March 27, 2020, and had payments due between March 27, 2020, and Dec. 31, 2020, could have payments postponed for up to one year.

However, these provisions of the CARES Act have now expired, and all new 401(k) loans must follow the original rules and guidelines.

Check Out: Emergency Loans: How to Get a Personal Loan Fast

401(k) loans: Pros and cons

While getting a 401(k) loan might help certain people, it isn’t the right choice for everyone. Here are a few benefits and drawbacks to consider:

Pros of 401(k) loans

• Credit check not required: Since you’re essentially borrowing money from yourself, you won’t have to undergo a credit check to get a 401(k) loan. This can be helpful for borrowers with poor credit who can’t qualify for other types of loans.
• Doesn’t affect your credit: A 401(k) loan isn’t reported to the credit bureaus, which means it won’t have any bearing on your credit.
• Could get a lower interest rate: Depending on your credit, you might get a lower interest rate on a 401(k) loan compared to a personal loan.

Learn More: How to Get a Personal Loan With Fair Credit

Cons of 401(k) loans

• Loss of investment gains: The biggest issue with a 401(k) loan is that you’ll lose overall investment gains by taking money out of the account. Additionally, because 401(k) loans have low interest rates, you might not pay enough interest to make up for these lost gains.
• Limited loan amounts: You can only borrow up to 50% of your vested balance or $50,000, whichever is less. This might not be enough to cover your expenses.
• Employment requirements: Since you have to remain employed with the sponsoring employer until the loan is paid back, you might feel stuck in your job. And if you’re laid off before paying off the loan, you’ll have to pay the entire loan back the following year or face taxes and penalties, which could put you in a tough financial position.

If you decide to take out a 401(k) loan, be sure to consider how much that loan will cost you to repay over five years. This way, you can prepare for any added expenses. You can estimate how much you’ll pay for a loan using our personal loan calculator below.

Check Out: How to Get a Fast Personal Loan for Quick Cash

401(k) loans vs. personal loans

Borrowing from your 401(k) isn’t the only way to get access to quick cash when you need it. Another option is taking out a personal loan, which might be a better choice in some cases.

You can generally use a personal loan for almost any personal expense, depending on the lender. The time to fund for a personal loan is usually about one week or less — though some lenders offer next- or even same-day loans for borrowers who are approved.

Here are some important points to keep in mind when comparing 401(k) loans vs. personal loans:

If you want to protect your retirement savings, a personal loan could be a better choice compared to a 401(k) loan. Before you borrow, be sure to consider as many personal loan lenders as possible to find the right loan for you.

Credible makes this easy — you can compare your prequalified rates from our partner lenders in the table below in two minutes.