Reviewed September 2026.
Choose a 401(k) loan over a personal loan when a same-horizon dollar comparison (payroll cash flow, foregone investment growth on the declining loan balance, fees, and any reduced contributions/match) still beats the outside loan’s interest and fees, your job looks stable through repayment, and the payroll hit does not kill your employer match. Choose the personal loan when outside credit is reasonably priced, you might change jobs, or you refuse to pull retirement dollars into a near-term bill. Broader 401(k) loan fit (not hardship cash-out): When should I take a 401(k) loan. Hardship withdrawal is a different fork: 401(k) loan vs hardship.
Decision table: plan loan vs personal loan
| Factor | Lean 401(k) loan | Lean personal loan |
|---|---|---|
| APR / fees | Plan rate often near prime + 1%; interest mostly returns to your account | CU/bank quote under ~11–14% with low/no origination after shopping |
| Job risk | You expect to stay through the term (or can repay / roll over an offset on time) | Layoff, resignation, or plan switch likely before payoff |
| Liquidity | You need to keep cash reserves intact | You can fund from cash or a cheap installment without touching the plan |
| Credit impact | No new installment tradeline (usually) | Builds installment history; hard pull possible |
| Opportunity cost | You accept markets may rise while $ is out | You keep the portfolio invested |
Personal-loan shopping: Compare personal loan offers. Use-case filter: When to use a personal loan.
Opportunity cost in plain numbers
Plan loans usually amortize with substantially equal payments, so the full $10,000 is not sitting out for three years. A fair sketch uses the declining balance: each month only the remaining principal misses market returns, while principal (and often interest) repaid to the account can be reinvested.
Illustrative 36-month loan of $10,000 at a 9% plan rate (payment ~$318/month): if missed growth is modeled at 7% annualized on the falling balance, foregone growth is on the order of roughly $1,050–$1,150 over the term (not the $2,250 you get from treating all $10,000 as uninvested for three years). Interest you pay “yourself” is a transfer inside the plan, not the same economic cost as interest paid to an outside lender.
Build one net-benefit line for the plan loan: start from outside-loan interest and fees avoided, then subtract plan-loan disadvantages (foregone growth on the declining balance, permanently lost employer match, and any extra plan fees). Example using the sketch above: ~$1,957 outside interest avoided − ~$1,126 foregone growth ≈ $831 before fees or lost match; a further $500 lost match would cut that benefit to about $331. Lost match increases plan-loan cost and decreases plan-loan net benefit.
Reduced employee contributions are different: that cash stays in your paycheck, but it also misses plan growth and may reduce match, count missed growth once. Alternatively, total plan-loan costs in one column and outside-loan costs in another, then pick the lower total.
A personal loan at 12% APR with $0 fee on $10,000 for 36 months costs about $1,957 in interest to the lender (payment ~$332/month). Compare those same-horizon dollars, not “plan rate + opportunity cost” as a single fake APR.
On job exit, the plan may demand repayment; an unpaid balance can become a loan offset. A qualifying separation-related offset can often be rolled into an IRA or plan by the tax-return due date (including extensions). Departure itself is not an automatic immediate tax bill, but missing the repayment/rollover path can be.
Worked example: $10,000 roof deposit
Riley needs $10,000.
| Path | Monthly (approx.) | Main risk |
|---|---|---|
| 401(k) loan, 5 years, 9% plan rate | ~$208 | Job exit; $10,000 out of markets; must keep match funded |
| CU personal loan, 36 months, 11%, $0 fee | ~$327 | Interest paid to CU; hard pull |
| Card at 24% revolving | Minimums drag | Worst carrying cost (Personal loan vs credit card) |
Riley picks the plan loan if employment is stable for 5 years, the match stays on, and CU quotes run 16%+. Riley picks the CU loan if a role change is likely in 12 months or the CU 11% beat clears the opportunity-cost worry.
Checklist
- Price the personal loan (APR, fee, total of payments) for the same payoff horizon.
- Read the SPD for loan limits (often lesser of 50% vested or $50,000), rate, and job-exit / offset / rollover rules.
- Confirm the payroll deduction still leaves room for the full match.
- Estimate opportunity cost at a modest assumed return (for example 5–7%), not zero.
- If job risk is high, prefer the outside installment loan or delay the expense.
Educational only. Not personalized financial, tax, or investment advice. Plan rules and tax treatment vary; confirm with your plan documents and a tax professional when needed.