Model the tradeoffs of using a 401k loan to refinance high-interest debt
This tool simulates two scenarios side-by-side: continuing with existing debts versus refinancing through a 401k loan. It reports monthly payment schedules, total interest paid, and the estimated impact on retirement growth while the loan is outstanding. Together, these components are combined into a single total net cost metric, which is intended to serve as the primary basis for evaluating the tradeoff between scenarios.
For users considering a strategy to stay out of high-interest debt in the future, the model also simulates the pairing of a 401k loan with a dedicated safety-net fund. This buffer is intended to reduce the likelihood of relying on high-interest debt (such as credit cards) when unexpected expenses arise. In effect, the model illustrates how a 401k loan can be used to refinance high-interest debt today while supporting a path to remain out of such debt over the life of the loan.
This tool encourages users to maintain a more stable financial path while the 401k loan is being repaid.
What this model shows
Monthly payment schedules
Compare monthly payment amounts under each scenario, assuming the same loan term.
Total interest paid
Compare total interest paid to external creditors versus interest effectively paid back into your own 401k retirement account.
Estimated retirement impact
Estimate the opportunity cost of borrowing from a 401k while the loan is outstanding, expressed as net forgone growth after accounting for interest paid back into your 401k retirement account.
Safety-Net (Buffer) Modeling
In addition to the core refinancing model, the calculator allows users to model a self-funded safety net, also referred to as a buffer. This feature is not a standard part of 401k lending, but an extension designed to evaluate whether pairing a refinance with a dedicated cash reserve can help cover unexpected expenses and reduce the need to return to high-interest debt during the loan term.
When enabled, a portion of the borrowed amount is set aside in a dedicated savings account rather than applied directly to debt repayment. The safety net is modeled as a cash balance held in a savings account, earning a modest, risk free rate and assumed to be drawn down gradually based on the user’s estimated monthly spending needs. It is intentionally not assumed to be invested in stocks, bonds, or other volatile assets, as the objective is liquidity and reliability.
Including a safety net may not be feasible for everyone, as holding cash alongside a 401k loan can increase required monthly payments. The calculator presents these tradeoffs explicitly, allowing users to assess whether the added flexibility is worth the cost.
What this tool is not
The model does not suggest that a 401k loan is appropriate for any individual situation. It presents estimates based on user provided inputs, so tradeoffs can be evaluated transparently.
Methodology & assumptions
Each scenario uses standard amortization rules. Any differences in results arise from differences in interest rates. All interest inputs are treated as annualized rates and converted to monthly rates for amortization. When multiple debts are entered, balances and APRs are consolidated into a single equivalent debt balance and blended APR.
When IRS loan limits (generally up to 50% of the vested 401k balance, capped at $50,000) prevent the full balance from being refinanced, the model automatically adjusts the scenario to reflect what is actually feasible. In these situations, only the eligible portion of the debt is refinanced through the 401k loan, while the remaining balance continues under existing creditor terms, meaning the reported 401k loan outcome represents a hybrid strategy rather than a full replacement of current debt.
For the safety-net scenario, the model calculates the total buffer amount based on the user estimated monthly dept spending × 12 × loan term (years). The calculator assumes this buffer is deposited into a high yield savings account earning the user specified APY, with interest credited monthly as the balance is gradually spent down over time. This savings interest is treated as a partial offset to the strategy’s total net cost, helping to reduce net interest burden. In some cases, reducing the retirement growth opportunity cost associated with borrowing the buffer amount.
Consistency principle: Each scenario is modeled using the same 401k loan term, ensuring repayment outcomes are compared over an identical payoff period.
Scenario structure
Creditor: Existing debts are modeled using current creditor APRs.
401k loan: Loan amounts are first capped using IRS loan limits, and interest paid on the loan is treated as returning to the retirement account.
Retirement impact modeling
Estimated retirement impact reflects foregone growth on borrowed funds while the loan is outstanding, based on a constant assumed rate of return. Actual investment performance may vary.
Limitations
Results are estimates. The model does not incorporate tax effects, employer specific repayment policies, changes in financial market, or changes in income or spending behavior over time.
Ready to evaluate your own scenario?
Run the model with your inputs and compare payoff paths.
Contact
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