Employees can borrow against their 401(K) plans with minimal paperwork, often by logging into their online accounts, according to Generation X Finance. Typically, plans allow participants to borrow up to 50 percent of their vested balances in minimum loan amounts of $500 to $1000 to a maximum loan of $50,000.
Some plans restrict borrowing against vested company-match funds, Generation X Finance notes. The vested amount that may be borrowed against typically includes any monies rolled-over into the 401(K) from outside accounts. Personal loans have a maximum loan repayment term of five years. Most plans have a provision allowing for fifteen-year repayment plans if the loan is used in the purchase of a primary residence. Additional documentation proving the money is intended for a home purchase is usually required. Loan repayment is typically in equal installments that are debited directly from the employee's paychecks. Interest rates are fixed at prime plus one percent, a loan origination fee may apply and loan proceeds are not taxed unless the borrower defaults.
A great advantage of 401(K) loans is that since the employee is borrowing against his own 401(K) account, he pays the interest back to himself. The greatest disadvantage is that in the case of default, the borrower must pay income taxes on the defaulted sum plus a 10 percent tax penalty, according to Generation X Finance.