The basic difference between a 401(k) loan and a personal loan is straightforward: a 401(k) loan comes out of your own retirement account, while a personal loan is something you get from a bank, credit union or other lender.
They’re both commonly used options when you need funds relatively quickly.
Features of a personal loan
A personal loan is unsecured debt that typically comes with the following features:
- Fixed interest rate (and monthly payment)
- Flexible repayment terms — meaning, there are multiple timelines in which to pay back the money you borrow (e.g. 36 to 84 month loan terms*)
- Opportunity to use the money for a variety of major expenses
- Fast decision, often within a couple of business days, if not sooner. Discover Personal Loans offers same-day decisions in most cases.
Discover also has 100% U.S.-based loan specialists available to answer any questions.
Some other factors to consider about personal loans:
- Because a personal loan is unsecured, the interest rate may be higher than other types of loans such as a loan that requires collateral, like a home equity loan.
- Personal loans are not typically used to purchase homes or cars, as other loan products that are specific to those purchases are often more appropriate.
Check out our tips on applying for a personal loan for more information.
Features of a 401(k) loan
Some aspects of a 401(k) loan that borrowers may find compelling include:
- Convenience and speed of getting money for short-term cash needs
- The interest you pay often goes back into your retirement plan
- May be easier to get approved depending on the plan administrator
While a 401(k) loan may work for some people, there are some potential drawbacks:
- Defaulting on your loan could result in it being treated as an early withdrawal, resulting in potential taxes and penalties.
- If your employment ends before you’ve paid back the loan, you may have to pay back the loan within a short amount of time.
- You could potentially miss out on gains and compounded interest from investments the money was in before the loan.
You should review your 401(k) plan documents for information on 401(k) loans.
Borrowing against your future?
Unfortunately, some people who take out 401(k) loans regret their decision. This may have to do with what some would call “borrowing against your future.”
A 401(k) is designed, after all, as a long-term savings and investment vehicle, not necessarily a lending product.
On the other hand, 85% of surveyed customers told us taking out a Discover personal loan for debt consolidation helped improve their financial future.**
Using a personal loan to consolidate debt can actually reduce interest payments and create a payment plan based on a fixed monthly amount. This certainty about the rate and amount you’re paying gives some people peace of mind.
Of course, every person’s situation is different and the outcome will likely depend on the rate you get, your ability to pay back the loan in a timely manner and your comfort level with the employer (401(k) loans) or lender (personal loans).
Want to learn about how to get a personal loan? Read about the Discover Personal Loan Process.