Borrowing From Yourself

What Is It

Several loan types let you borrow against something you already own instead of applying for credit from scratch: a 401(k) loan against your retirement balance, a margin loan or securities-backed line of credit (SBLOC) against an investment portfolio, a policy loan against the cash value of a life insurance policy, or a loan secured by a CD or savings balance. They all share the same pitch — it's your own money backing the loan — but that phrase means something different in each case.

Why It Matters

“Your own asset as collateral” doesn't mean the asset is what's exposed, or exposed in the way you'd expect. A 401(k) loan is the one case where the money is actually withdrawn and handed to you in cash — it's out of the market and not earning anything until you repay it, so lost growth is the real risk. A margin loan or SBLOC works differently: your portfolio keeps moving with the market on its own, but a margin call can force a sale at the worst possible moment, on a position that would have been fine to hold. A cash-value life insurance loan is milder still: the cash value generally keeps compounding since a policy loan isn't a withdrawal, but if the loan plus interest ever exceeds that cash value, the policy lapses and the growth that got you there doesn't prevent the resulting tax bill. A CD-secured loan is the gentlest of the four — the CD keeps earning its own rate the whole time, and if you default, the lender simply keeps the CD.

A few other differences matter too. Interest on a 401(k) loan goes back into your own account, with no credit check and no effect on a credit report or debt-to-income ratio. A CD-secured loan is the exception — credit unions typically report it to the bureaus and market it as a credit-building tool, so “this won't show up on my credit report” holds for three of the four, not all.

Quick Example

Someone takes a $15,000 loan against their 401(k), within the IRS limit of the lesser of $50,000 or 50% of their vested balance. Standard repayment is five years, though a plan can allow a longer, plan-defined term specifically for a loan used to buy a primary home. They then lose their job with $9,000 still outstanding. Under rules that took effect January 1, 2018, they no longer have just 60 days to act — they have until the due date, including extensions, of that year's federal tax return to roll the $9,000 offset into an IRA. Miss that deadline, and the $9,000 becomes a taxable distribution, plus a 10% early-withdrawal penalty if they're under 59½.

Try It Yourself

See what a 401(k) loan actually costs in lost investment growth while the money sits out of the market.

Related Concepts