Borrow From 401k: True Cost Calculator and Guide

The Real Cost of a 401k Loan

Many people assume a 401k loan is “free money” because you pay interest to yourself. While it’s true there are no penalties or taxes, the true cost is more nuanced. Let’s break down every component.

Understanding 401k Loan Interest Rates

401k loan interest rates are typically set at the prime rate plus 1%. As of early 2025, this means rates around 8.5% to 9.5%. While this interest goes back into your own account, it’s paid with after-tax dollars — creating a subtle form of double taxation.

For a detailed breakdown, see our 401k loan interest rate guide.

Sample Interest Costs by Loan Amount

Loan Amount	Rate (Prime +1%)	Monthly Payment	Total Interest (5 yr)
$10,000	8.5%	$205	$2,313
$20,000	8.5%	$410	$4,627
$30,000	8.5%	$616	$6,940
$50,000	8.5%	$1,026	$11,567

The Opportunity Cost Factor

The biggest hidden cost of a 401k loan is opportunity cost — the investment returns you miss while the money is out of the market.

Market Performance Scenarios

For a $20,000 loan over 5 years:

• Bull market (10% annual returns): You miss approximately $12,210 in gains
• Average market (7% annual returns): You miss approximately $8,050 in gains
• Bear market (-5% annual returns): You actually avoid $4,540 in losses
• Flat market (2% annual returns): You miss approximately $2,080 in gains

This means that in most market environments, the opportunity cost exceeds the interest you pay yourself. Read more in our detailed 401k loan opportunity cost analysis.

Tax Implications of 401k Loans

While 401k loans themselves aren’t taxable, there are tax considerations:

The Double Taxation Issue

1. You repay the loan principal and interest with after-tax dollars
2. When you withdraw in retirement, those same dollars are taxed again

For someone in the 22% tax bracket, this means the interest portion of your repayment is effectively taxed twice — costing you an extra 22% on the interest amount.

If the Loan Defaults

If you fail to repay the loan (typically because you left your job), the outstanding balance becomes a deemed distribution. This means:

• Full income taxes on the unpaid balance
• 10% early withdrawal penalty if you’re under 59½
• No further repayment obligation

Learn more about the consequences in our 401k loan default guide.

401k Loan Repayment Schedule

Standard 401k loans must be repaid within 5 years through payroll deductions. Here’s what a repayment schedule looks like:

$20,000 Loan at 8.5% Over 5 Years

Year	Beginning Balance	Annual Payments	Interest	Principal Paid	Ending Balance
1	$20,000	$4,924	$1,613	$3,311	$16,689
2	$16,689	$4,924	$1,314	$3,610	$13,079
3	$13,079	$4,924	$990	$3,934	$9,145
4	$9,145	$4,924	$641	$4,283	$4,862
5	$4,862	$4,924	$268	$4,656	$0

For detailed repayment timelines and strategies, see our 401k loan repayment schedule guide.

When Borrowing From Your 401k Makes Financial Sense

Despite the costs, a 401k loan can be the right move in certain situations:

1. You have no other low-cost borrowing options: If your credit score makes personal loans expensive, a 401k loan at prime +1% might be cheaper
2. Short-term, defined need: You know exactly when and how you’ll repay
3. Job stability: You’re confident you’ll stay with your employer for the repayment period
4. Avoiding worse alternatives: The alternative is high-interest credit card debt or payday loans
5. Market timing: If you believe the market will decline, being partially in cash can be beneficial

Compare alternatives in our 401k loan vs personal loan guide and 401k loan vs HELOC comparison.

When It Doesn’t Make Sense

Avoid 401k loans when:

• You’re nearing retirement and can’t afford to lose compounding time
• You’re planning to change jobs soon
• You already have adequate emergency savings and other borrowing options
• The purpose is discretionary spending (vacation, luxury purchase)
• You might need to file bankruptcy (401k assets are generally protected from creditors)

Using Our Calculator

Our 401k comparison calculator lets you input your specific numbers to see:

• Exact monthly payment amounts
• Total interest paid to your account
• Estimated opportunity cost based on market assumptions
• Side-by-side comparison with early withdrawal costs
• Comparison with alternative borrowing options