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How is your 401(k) invested?

If you borrow from your 401(k), the amount you have borrowed is taken from your 401(k) balance, so less money will be invested. So, while the interest you pay on a 401(k) loan is going back into the 401(k), the part of the loan principal that hadn't been paid back yet will not be invested. (This is called "opportunity cost"--the lost opportunity by not being invested because the money is tied up elsewhere.)

On the other hand, if the money is borrowed from a bank or credit union, the full 401(k) amount remains invested.

The payment of a 401(k) loan doesn't have any advantage over a bank loan: payments to both loans are from after-tax funds.

401(k) loans also have another disadvantage: if one becomes separated from service (found a better position with a different employer, downsized, etc.), most 401(k) provider require that the loan be paid off quickly, typically 30 days from date of separation, or the loan balance will be deemed an unqualified distribution (subject to income tax and 10% penalty, plus any state income tax and state penalty).
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