What Generally Happens to Your 401(k) Growth While a Loan Is Outstanding?
Taking a loan against a 401(k) can feel different from other kinds of borrowing, since the money and the lender are technically the same account. But that closeness raises a natural question: what happens to the growth on the portion that’s been borrowed while the loan is still outstanding?
In short
Once money is borrowed from a 401(k), that portion is removed from the plan’s investments and is no longer subject to market gains or losses while the loan is outstanding. Instead, the borrower typically repays the loan with interest, and those payments go back into the account. Whether that arrangement helps or hurts the account’s overall growth depends heavily on how the market performs during the repayment period.
Why the borrowed amount stops growing with the market
A 401(k) loan isn’t like a typical loan from a bank, where an outside institution lends money it holds separately. Instead, the loan is funded by selling off part of the account holder’s own invested balance to generate cash. That sold-off amount is removed from the account’s mix of stocks, bonds, or funds and is no longer participating in whatever the market does next. If the market rises significantly while the loan is outstanding, that borrowed portion misses out on those gains. If the market falls, the borrowed portion also avoids that specific dip, since it isn’t invested during that stretch.
How repayment works
Loan repayments are usually made through payroll deductions and include both principal and interest, with the interest rate typically set according to the plan’s rules, often a small margin above a benchmark rate. As payments come in, they’re generally reinvested into the account according to the current investment elections, meaning the repaid money re-enters the market at whatever prices exist at the time it goes back in, not the prices from when it was originally borrowed.
Because the interest paid on the loan technically goes back into the borrower’s own account rather than to an outside lender, some people describe this as “paying interest to yourself.” That framing is only partly complete, though, since it doesn’t account for the opportunity cost of the borrowed amount having been out of the market, potentially missing growth, during the loan period.
Comparing the possible outcomes
- Market rises during the loan. The borrowed portion misses growth it otherwise would have captured had it stayed invested, meaning the account could end up smaller than if no loan had been taken.
- Market falls during the loan. The borrowed portion avoids that decline, which in hindsight can work in the borrower’s favor compared to leaving the full balance invested through the drop.
- Market is roughly flat. The difference between borrowing and not borrowing may be relatively minor, with the interest paid back being one of the more noticeable factors.
Because nobody knows in advance which of these scenarios will play out, the effect of a 401(k) loan on long-term growth can really only be evaluated in hindsight. It’s a different kind of uncertainty than what happens during an ordinary market downturn, since a loan removes money from the market entirely rather than leaving it exposed to a temporary drop.
Other factors that affect the account
Beyond market movement, a few other mechanics are worth understanding. Some plans pause new employee contributions to certain investment options while a loan is outstanding, or apply the loan balance against future contribution limits in specific ways, so checking plan-specific rules matters. There’s also the risk tied to leaving a job while a loan is unpaid: many plans require the remaining balance to be repaid within a short window, and an unpaid balance can be treated as a taxable distribution, which is a separate issue from the growth question but often gets weighed alongside it. This overlaps with broader questions about what happens to a 401(k) when changing jobs.
The bottom line
While a 401(k) loan is outstanding, the borrowed amount isn’t invested and therefore isn’t subject to market swings one way or the other during that stretch, with repayments (including interest) flowing back into the account as they’re made. Whether that arrangement ends up costing or saving money compared to leaving the balance fully invested depends entirely on what the market does in the meantime, which isn’t knowable ahead of time.