Personal loan vs 401k loan

If your emergency fund is running out and you need to access money quickly, taking a personal loan or a 401(k) loan could be an option. These two types of loans are easy to apply for and have a short loan processing time. However, there are certain features that set them apart.

The choice between a personal loan and a 401(k) loan depends on your situation. A 401(k) loan is a better choice since you are borrowing from yourself at 0% net interest. There are no lenders, and you can get a loan with bad credit. On the other hand, if you are borrowing a small amount of money and you want to preserve your retirement savings, you can opt for a personal loan. However, you will need a good credit score to qualify for a decent interest rate.

What is a 401(k)?

A 401(k) is a retirement savings plan that employees use to build their retirement nest egg. When you open a 401(k) account, you can set up payroll deductions so that the employer can deduct your contributions every pay period. Some employers may also offer a company match, where the employer makes contributions to your 401(k) in addition to the amount you contribute.

Should you borrow from a 401(k)?

Taking a 401(k) loan may be an attractive option since you are borrowing from yourself. We can help you unlock your old 401(k) and qualify for a 401(k) loan even if you have an average or poor credit. You can borrow half of your account balance up to $50,000. You will be required to make loan payments at 0% net interest.

401(k) loan pros

Quick approval

401(k) loans do not involve credit checks, and this reduces the loan processing time. As long as the employer allows 401(k) loans and you have sufficient balance, you can get approved quickly. A personal loan often takes longer since the lender has to review your credit history and your income to know if you qualify to get a loan.

Interest goes back to yourself

Unlike a personal loan where the interest is paid to the lender, the interest you pay on a 401(k) loan goes to your retirement account balance. This means you will be returning your retirement money to the 401(k) to continue compounding.

401(k) loan Cons

Risk of tax and penalty

If you are unable to pay the outstanding balance on your 401(k) loan, the unpaid loan will be considered to be in default. You will owe income tax on the balance and a potential penalty.

Loan limit

A 401(k) limits the amount you can borrow to 50% of your account balance up to $50,000. If your balance is below $20,000, you can only borrow up to $10,000. However, some lenders allow borrowers to take a personal loan of up to $100,000.

What is a personal loan?

A personal loan is sometimes known as a consumer loan, and it refers to the amount borrowed from a financial institution for personal use such as to pay for home renovations, take a vacation or consolidate debt. You can get a personal loan from a bank or online lenders.

Person loan pros

Unsecured

You can take an unsecured personal loan, and you won’t be required to pledge any collateral for the loan. If you default on the loan, the lender cannot seize your assets to pay off the loan.

Fixed interest rate

Personal loans typically have fixed interest rates, so your monthly loan payments will remain the same for the life of the loan.

Personal Loan Cons

The loan could be rejected

If you don’t meet the minimum credit score requirement, your loan could be rejected. Lenders are in business to make money, and they could reject your loan application if you present a high risk of default.

High interest rate

As an unsecured loan, a personal  loan could have a high interest since you are not required to provide collateral. Also, an average credit score could attract a high interest rate to compensate for the high risk of default. 

Personal loan vs. 401(k) loan

Should you borrow a personal loan or a 401 loan? Unfortunately, every person's situation is different, and each type of loan could be a better option depending on their situation.

A 401(k) loan would make sense if you feel secure in your job, and you don’t plan to leave the employer anytime soon. A 401(k) loan has a lower interest rate than a personal loan, and the interest you pay goes to your retirement account. If your credit score is not good enough to get a personal loan with a decent interest rate, a 401(k) can be a good alternative. With a Beagle 401(k) loan, you can borrow up to the IRS limit at zero interest without worrying that you will be fired. 

On the other hand, a personal loan could be your best bet if you want to preserve your retirement savings. With a good credit score and a stable income, you can  negotiate the interest rate on the personal loan. You will be required to make loan payment payments to the lender every pay period.