10/23/2025
Consider this (and, to be clear, this is NOT financial advice nor suggestion):
You’re trying to pay down high interest debt, but you’ve been at your job awhile. You don’t make much, so you don’t have extra money to throw at stuff like that.
You likely COULD take out a 401k loan and pay that debt off.
Maybe you’re thinking, “why would I take out debt to pay debt?!” Well, here’s some facts:
• High interest debt is just that: high interest. Usually, 15-30% on credit cards, much higher on payday loans.
• A 401k loan is almost always much lower interest which, weirdly enough isn’t great. Doesn’t make sense, right? Here’s why: when you take out a 401k loan, you’re paying YOURSELF back, including the interest. So low interest means you owe yourself less money.
The important part is that you now have liquidity to pay off those high interest debts. You’ll pay less overall, hopefully less every month, and you’ll end up with less stress and more money in your pocket.
Now, you know as well as I do, you can’t have the good without the bad. So why isn’t everyone getting 401k loans to pay off other debts?
Well, first of all, while you’re borrowing from yourself, you’re probably not a loan officer (and even if you are, it’s a conflict of interest to originate your own loans). That means someone has to do the paperwork and get the check issued and almost no company waives the fees associated with that. Generally, the origination fee is ≤$100, but there may also be maintenance fees for the duration of the loan.
Another cost to consider is that money that is loaned out is almost never being invested, so that portion of your retirement isn’t growing (it also may not be shrinking, but that’s more advanced math, inflation vs stock market gains/losses). That means, if there’s a spike in your investments while you have the loan out, you miss out on those gains. Depending on the size of your loan, those gains may or may not outweigh the savings on interest that’d otherwise be paid on your high interest debts.
A less mathematical consideration that especially applies to job hoppers and people that lack job security: while a loan is just that, one of the contingencies is that 401k loans are paid back through your payroll in most cases. If you separate from your employer for any reason, the loan balance is generally due within 90 days or less. Otherwise, you face a taxable event (remember, loans are NOT taxable) because your loan just became a distribution. And if you’re under 59½, there’s a 10% penalty for that distribution in MOST cases.
Again, depending on how much high interest debt you’re paying off, it may still be net positive to take advantage of a 401k loan, but it is NOT a get out of debt free card.
Thanks for coming to my TED Talk and if you’re interested in an individualised plan to get you out of debt or help you reach other financial goals, please reach out. We are ready to help you.
