The average credit card balance is $6,371 as of July 2025, with an average annual percentage rate of 25.34%.¹ ² This high cost leads many to ask: *“Should I borrow from my 401(k) to pay off debt or make a major purchase?”*³
Advantages of 401(k) Loans
- No Credit Check – Approval depends only on your plan’s rules.
- Convenience – Generally less paperwork and faster access than other loans.
- Competitive Interest Rates – Usually lower than credit cards or personal loans. Plus, interest is paid back to your own account.
Disadvantages of 401(k) Loans
- Opportunity Cost – Borrowed funds won’t grow with your investments. Loan borrowers often stop contributing, missing potential gains and employer matches.
- Job Risk – If you leave or lose your job, unpaid balances may be considered a distribution—taxable and subject to a 10% penalty if under age 59½. Repayment terms are typically strict.⁴
- Red Flag – Borrowing to cover current spending may signal overspending. If debt piles up again, you may be worse off.
Most experts caution against 401(k) loans. Still, if funds are absolutely necessary, a loan may be better than an outright distribution.
Sources:
- Bankrate.com, July 2025
- Forbes.com, Aug 2025
- Note: Once you reach age 73, you must begin taking required minimum distributions (RMDs) from your 401(k) or other defined-contribution plans. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% penalty.
- IRS.gov, 2025
Disclaimer:
The content is developed from sources believed to be accurate. It is not intended as tax or legal advice and may not be used to avoid federal tax penalties. Please consult professionals for advice regarding your specific situation. This material was developed and produced by FMG Suite. FMG Suite is not affiliated with the named broker-dealer, state-, or SEC-registered advisory firm. Opinions expressed are for general information only and not a solicitation for the purchase or sale of any security.
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