What is a 401(k) loan?

A 401(k) loan refers to a loan taken from retirement savings accumulated in a 401(k) plan. This type of loan allows individuals to borrow a portion of their own retirement funds, which they can then use for various personal expenses, such as paying off debt or covering large purchases. Importantly, since the funds come from the individual's own retirement account, there is generally no credit check required, and the individual pays interest on the loan back to their own retirement account.

The ability to take a loan from a 401(k) is usually subject to specific terms and limits set by the plan, including the maximum amount that can be borrowed, which is typically up to 50% of the account balance or a maximum amount specified by the plan (often around $50,000). Repayment is typically required within a designated timeframe, usually five years, unless the loan is taken to purchase a primary residence, which may allow for longer repayment periods.

This option is distinct from other types of loans, particularly those that involve external lending institutions or loans that do not require repayment, as well as loans aimed specifically at real estate purchases.