What Interest Rate and Fees Do You Pay on a 401(k) Loan?
Most plans set the 401(k) loan interest rate at the prime rate plus 1% or 2%, fixed at origination for the life of the loan, and every dollar of interest is paid back into your own account rather than to a bank. Fees are a separate matter. Plans commonly charge a $50–$100 origination fee, and sometimes a small annual fee, and those go to the recordkeeper.
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The law requires a 401(k) loan to charge a reasonable rate of interest, comparable to what a commercial lender would charge for a similar loan. In practice most plans use prime + 1% or prime + 2%, locked in when the loan is issued. To estimate your rate, look up the current prime rate and add your plan’s margin. The plan document states the formula.
What is the typical 401(k) loan interest rate?
There is no single national 401(k) loan rate, which is why you will not find one quoted anywhere reliable. Each plan sets its own, and the most common formula is the prime rate plus one or two percentage points.
The prime rate moves with Federal Reserve policy, so the right way to estimate your rate is to look up the current prime rate, which is published daily in the financial press, and add your plan’s stated margin. Some plans instead use a flat rate that they review periodically. Either way, the plan has to be able to show the rate is reasonable, meaning comparable to commercial lending rates for a similar secured loan.
Because the benchmark is prime rather than your credit profile, a 401(k) loan’s rate is often lower than a credit card or an unsecured personal loan, and your credit history does not change it at all. That is one reason the loan can beat those alternatives when you genuinely need to borrow. How much you can borrow and how repayment works are covered on the main loan rules page.
Who gets the interest on a 401(k) loan?
You do, all of it. The interest you pay does not go to your employer, to the recordkeeper, or to a bank. It is deposited back into your own 401(k) account along with the principal and invested according to your elections.
You are effectively both the borrower and the lender, which makes the interest rate on a 401(k) loan a different animal from a bank loan’s. A higher rate is not purely a cost. It is partly forced savings flowing back to you. The one honest caveat is that you pay it with after-tax dollars, a nuance covered on the repayment page.
Fixed rate at origination
In nearly all plans, the rate is set when the loan originates and stays fixed through the full term, which is up to 5 years for a general purpose loan and longer for a principal residence loan. If prime rises after you borrow, your rate does not move. If prime falls, it does not fall either.
A new loan taken later would price at the then-current rate, so borrowers who took loans in different years often carry very different rates on paper. Neither one is wrong.
Loan fees
Unlike interest, fees do not come back to you. They compensate the recordkeeper for administering the loan, and they are the part of the cost people most often overlook. Two kinds are typical.
- Origination (issuance) fee: a one-time charge when the loan is set up, commonly in the $50–$100 range, usually deducted from your account or the loan proceeds.
- Annual maintenance fee: some plans charge a smaller yearly fee for each year the loan is outstanding; others charge nothing after origination.
Amounts vary widely by plan and recordkeeper, and some employers absorb part or all of the cost. Your loan paperwork and the plan’s fee disclosure, which is the 404(a)(5) participant fee notice, list the exact charges.
Read those before you borrow. On a small loan a $100 fee is a meaningful percentage of what you are borrowing, and it is worth knowing whether a $2,000 loan really costs you 5% at the door.
The military rate cap (SCRA)
Under the Servicemembers Civil Relief Act, if you took the loan before being called to active duty, the interest rate is capped at 6% during your period of military service. The cap is not automatic. You have to request it and provide a copy of your orders.
Payments can also be suspended for the entire period of uniformed service, which is a stronger protection than the ordinary 12-month leave rule. See loans during a leave of absence for the full military rules (IRC §414(u); SCRA).
The real cost of borrowing
The visible costs, meaning interest and fees, are the small part of the picture. The larger cost is usually opportunity cost. Every dollar out on loan is a dollar out of the market, so while the loan is outstanding that money earns your loan’s interest rate instead of whatever your investments would have returned.
In flat or falling markets a loan can accidentally come out ahead, since you avoided the losses. In rising markets, missing the growth on tens of thousands of dollars for several years can cost far more than any fee.
Then there is the tail risk, which is the one that actually hurts people. If you leave your job with a balance outstanding and cannot repay it, the loan becomes a taxable offset or default. That risk is small in any given month and it is not zero over five years.
Cost comparison with alternatives
The table below shows how the main options stack up.
| 401(k) loan | Credit card / personal loan | Hardship withdrawal | |
|---|---|---|---|
| Interest goes to | Your own account | The lender | None (no repayment) |
| Rate driver | Prime + 1–2%, plan-set | Your credit profile; often much higher | N/A |
| Fees | Commonly $50–$100 origination, sometimes annual | Possible origination/annual fees | Usually none, but taxes + possible 10% penalty |
| Credit check / credit report | None / never reported | Yes / reported | None / never reported |
| Hidden cost | Money out of market; tax risk if you leave your job | Compounding interest to a third party | Balance never comes back |
If you are weighing outside borrowing instead, the comparison below lines up the four options people most often choose between. Rates change constantly, so the table describes what drives each rate rather than quoting numbers that would be stale by the time you read them.
| 401(k) loan | Personal loan | HELOC | Credit card | |
|---|---|---|---|---|
| What sets the rate | Your plan’s formula, commonly prime + 1–2%, fixed at origination | Your credit profile and income, usually fixed for the term | Usually variable, tied to prime plus a margin, and secured by your home | Variable and typically the highest of the four, and it compounds |
| Who receives the interest | Your own retirement account | The lender | The lender | The card issuer |
| Tax deductibility | Never deductible, including a principal residence loan | Not deductible | May be deductible under the mortgage-interest rules when the money buys, builds, or substantially improves the home securing it. Ask a tax preparer | Not deductible |
| Credit impact | No credit check, never on your credit report, and a default is not reported either | Hard inquiry, reported, and missed payments damage your score | Hard inquiry, reported, and it reduces your available home equity | Reported, and a high balance raises your utilization and can lower your score quickly |
| What goes wrong in the worst case | You leave the job, the balance is offset, and it becomes taxable income plus a 10% penalty under 59½ unless you roll it over in time | Collections, a judgment, and lasting credit damage | Foreclosure, because your house is the collateral | Compounding balance you cannot clear, plus credit damage |
| Speed to funds | A few business days to two weeks | Often a few days | Weeks, since it involves an appraisal and closing | Immediate if the line already exists |
Read that last-row comparison together rather than column by column. A 401(k) loan puts your retirement savings at risk if your job ends, and a HELOC puts your house at risk if your income does. Neither risk shows up on a rate sheet, and for most people the question is which one they can live with.
The pattern across both tables is consistent. A 401(k) loan is usually cheaper than unsecured borrowing and far cheaper than a hardship withdrawal, as long as you stay employed and repay on schedule. Its costs are quiet ones, meaning market growth foregone and the what-if of a job change, rather than a rate printed on a statement.
Frequently asked questions
Do you pay interest on a 401(k) loan?
Yes, every 401(k) loan charges interest, because the law requires a reasonable, commercially comparable rate. The difference from a bank loan is where that interest lands. It is credited back to your own account rather than paid to a lender.
How is 401(k) loan interest calculated?
The same way a standard amortizing loan works. The plan applies the fixed rate to your declining balance and builds level payments that retire principal and interest over the term. Your loan paperwork shows the payment amount and the total interest over the life of the loan.
Why is my plan’s loan rate higher than my neighbor’s?
Each plan sets its own formula. Prime + 1% and prime + 2% are both common, and some plans use a flat rate. Loans issued at different times also lock in different prime rates. Both can be “reasonable” under the rules, and your plan document states yours.
Is 401(k) loan interest tax-deductible?
No. Even a principal residence loan from a 401(k) is not a mortgage. There is no lien on the home, so the interest doesn’t qualify for the mortgage-interest deduction, and personal interest isn’t deductible.
Can my plan change the interest rate on my existing loan?
Generally no. The rate is fixed at origination for the life of the loan in nearly all plans. The one common exception cuts in your favor, and that is the SCRA 6% cap during active military service, which you must request with a copy of your orders.
Are loan fees taken from my account or my paycheck?
Usually from your account or netted out of the loan proceeds, not your paycheck. Check your plan’s participant fee disclosure for the exact amounts and how they’re collected. Some employers pay part or all of the fee.
Related reading
- 401(k) loan rules: the 2026 limits and how to borrow
- How to pay back a 401(k) loan and pay it off early
- General purpose vs. principal residence loans
Sources: IRC §72(p) · DOL Reg. §2550.408b-1 (reasonable interest) · IRS: retirement plan loans