If you’re considering borrowing from your 401(k), you’re probably wondering about the interest rate. Will it be cheap? Will it hurt your retirement?
The answer is more nuanced than “low rate = good deal.” The interest rate matters, but it’s only part of the picture.
Here’s what you need to know about 401(k) loan rates and what they actually cost you.
What Is the Interest Rate on a 401(k) Loan?
401(k) loan interest rates are set by each retirement plan, but they are often tied to the prime rate. According to Fidelity, these rates are typically the prime rate plus 1 to 2 percentage points. With the Federal Reserve’s Bank Prime Loan Rate currently at 6.75%, that would put a typical 401(k) loan interest rate at about 7.75% to 8.75%, depending on your plan.
That may look reasonable compared with the average credit card interest rate for accounts charged interest, which was 21.52% in the latest available Federal Reserve data, or the average personal loan rate, which was 12.28% as of June 10, 2026, according to Bankrate. And on the surface, it can be.
But here’s the catch: the interest rate is only one cost. There are also plan fees, missed investment growth, and job separation risks that can make the true cost much higher.
How 401(k) Loan Interest Rates Are Set
Most plans use a formula: prime rate + a fixed percentage. Prime + 1% is common, but some plans use prime + 2% or even a flat percentage. The exact formula depends on your employer’s plan. There’s no universal 401(k) loan rate—it’s plan-specific.
When you take out the loan, your rate is locked in based on the formula at that time. If rates rise, your rate doesn’t change. That’s actually good for you.
What Factors Affect Your Rate
- Your employer’s plan rules: Some plans offer 401(k) loans, some don’t. Those that do set their own formulas.
- The prime rate at the time of borrowing: Since most plans use prime + a percentage, your rate depends on what prime is when you borrow.
- Whether it’s a general loan or home purchase loan: Some plans charge different rates for different purposes.
- Fees: Beyond interest, many plans charge setup fees, annual maintenance fees, or other costs that add to the total borrowing expense.
What Is a Good Interest Rate on a 401(k) Loan?
It depends on what you’re comparing it to. Compared to credit cards? Yes, 7-9% is great. Compared to a personal loan? Maybe. Some people qualify for personal loans at 6-8%, so you might get similar rates without the retirement risk.
Compared to what your money would earn in the market? Not so great. If your 401(k) earns 7% average annual returns, borrowing at 8% means you’re losing money on the opportunity cost.
The point is that a “good rate” is relative. Focus on the total cost, not just the interest rate.
How 401(k) Loans Compare With Other Borrowing Options
A 401(k) loan may look less expensive than some other borrowing options, but the interest rate is only part of the cost. It can also affect your retirement savings and your paycheck.
| Borrowing option | Pros | Cons |
| 401(k) loan | No credit check if your plan allows loans. Interest is paid back into your account. The rate may be lower than some credit cards or personal loans. | You may lose retirement growth while the money is out of your account. Loan payments usually come out of your paycheck. Your plan may charge fees. If you leave your job, you may have to repay the loan faster. |
| Personal loan | Does not use your retirement savings. Usually has a fixed payment and fixed repayment term. Available from banks, credit unions, and online lenders. | Approval depends on your credit, income, and lender rules. Rates can vary widely. Some loans may include fees. |
| Credit card | Flexible access to funds. May be useful for short-term expenses if the balance is paid off quickly. | Interest rates are often high. Carrying a balance can make the debt harder to pay down. Minimum payments may keep you in debt longer. |
The Hidden Costs of a 401(k) Loan
The interest rate isn’t the only cost:
- Missed growth: Let’s say you borrow $20,000. That money would have earned, say, 7% annually in the market. While you’re repaying, you’re missing that growth. That can cost you thousands over years.
- Plan fees: Many plans charge setup fees ($50-100), annual maintenance fees, or loan servicing fees. These add to the cost.
- Payroll deduction pressure: Your employer deducts loan payments from your paycheck. That’s convenient, but it can tighten your monthly cash flow. One missed paycheck and you’re behind.
- Job separation risk: If you leave your job while a loan is outstanding, you typically must repay it quickly (often 60-90 days). If you don’t, the unpaid amount is treated as a distribution and taxed as income, plus a 10% penalty if you’re under 59½.
That last one is huge. A $20,000 loan that becomes a distribution? You’re looking at $6,000+ in taxes and penalties.
The Bottom Line
A 401(k) loan’s interest rate looks attractive. But the rate is just one piece of the puzzle.
Factor in fees, missed growth, job risk, and cash flow pressure. The true cost is often much higher than the quoted rate suggests.
