What Is a 401k Loan?

A 401k loan is a loan that allows a person to borrow up to 50 percent of his 401k account balance up to $50,000. In most cases, the loan must be repaid within five years, but an extension may be possible if the money serves as a down payment on a home.

A 401k loan does not require approval by a bank, and there is no credit check. The recipient can usually gain access to the money much faster and at a lower interest rate than a typical bank loan.

An employer can decline to allow its employees to take loans on their 401k plans, and they can place their own restrictions on the reasons for taking out a loan. Many employers only allow employees to take out loans to pay for the education expenses for the employee or the spouse or child of the employee; to prevent the employee from being evicted from his home; or to pay un-reimbursed medical expenses. Employers may also allow loans on 401k plans for use as down payments on first-time home purchases. Employers can set minimum allowable amounts for 401k loans and set limits on how many loans an employee can take out.