Why Borrowing Against Your 401k is a Good Option

While many people advise against borrowing from your 401K, sometimes it is your best or only option. Once you borrow against it, yes, your money stops growing. There are situations though where you need to do so for a short or long term loan, and this still pans out for the best.

Your Household Income Has Drastically Been Reduced

If your household income has reduced, borrowing from your 401k is a pretty safe option. As long as you are still employed, you can put the funds back into the account. If something happens where you lose your employment and you can’t pay it back in full, this will be considered taxable income. However, it’s the better option than taking out a home equity line of credit and risk losing your home if you can’t make that payment. The same goes for these high-interest rate loans which take the full payment due automatically from your checking account.

You Can’t Get a Decent Interest Rate

Another reason borrowing against your 401k is a good option is if you have bad credit. Bad credit makes it hard to get a loan with a decent interest rate, and that’s if you’re approved at all. Taking out a 401k loan does subject you to paying an interest rate. However, that is paid back into your 401k plan.

You Need a Short Term Loan Fast

Sometimes you just need a short term loan immediately. Applying for a personal loan with your bank or credit union could take two to three weeks for approval. That may be your window of opportunity you needed the loan for.

Quick loans such as payday loans and cash advances are fast, but come at a cost. You could have your 401k funds in your account in as little as two business days from them processing your loan withdrawal paperwork by doing a direct deposit. Sure, there’s an administration fee, but that’s much lower than the interest you’d have paid for a payday loan.

You Can’t Take the Chance of a Credit Check

For anyone with a plan of getting a mortgage loan or working on improving their credit, avoiding the check is the best route. With your 401k loan, there are no credit checks, which means nobody even has to know you’ve taken the loan out.

Borrowing against your 401k is not as drastic as many make it out to be. These are the safest, affordable loans at your disposal.


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