Payroll Deduction Loan vs. 401(k) / TSP Loan: True Cost Analysis

Understanding the Hidden Cost of Borrowing from Retirement

When unexpected emergencies strike, employees often debate whether to take a loan from their 401(k) or use an employer-sponsored payroll deduction installment loan.

While a 401(k) loan offers low interest rates that you pay back to yourself, the true hidden cost lies in lost compound market returns. When stocks rally, the money you borrowed sits out of the market, potentially costing you thousands in future retirement wealth.

Additionally, if you resign or are laid off while having an outstanding 401(k) loan, the entire balance typically becomes due before your next tax return, or it is treated as a taxable early distribution with a 10% IRS penalty.