Can You Borrow Money Using Your 401(k) As Collateral?

A 401(k) cannot be directly used as collateral for a loan. However, it is sometimes possible to borrow money from one's 401(k) for a certain percentage of the available funds.

A 401(k) cannot be used as collateral because an individual is not allowed to sign it over. A 401(k) account exists in an employer's name, and the plan defined by the employer defines whether an individual is allowed to take money out of the 401(k). Distributions from one's 401(k) are sometimes allowed based on hardship, depending on the plan administrator.

As of 2013, a person choosing to borrow from a 401(k) can borrow up to either $50,000 or half of the vested account balance, whichever is less. If a 401(k) has between $10,000 and $20,000 vested, it is possible to borrow up to $10,000. Loans made against a 401(k) must be repaid within five years with interest; failing to pay back the loan results in income taxes and 10 percent early withdrawal penalties for a person under 59 1/2 years old.