The money must be repaid within five years unless it is a loan for a home, in which case the term is set by the employer. Although the employer sets the interest rate, the Department of Labor prohibits loans offering a below-market interest rate. In other words, your employer must charge you roughly the same as a bank would charge consumers. As a result, most employers tie their interest rate to the prime rate, the base rate on corporate loans at large money-center banks. So you can expect to pay one or two percentage points above that.
Many plans also charge loan processing and administrative fees.
That's not quite true. First, you should know that most plans do not allow you to continue your repayment schedule if you leave the company. That means you must pay back the outstanding balance if you leave for whatever reason-whether you quit or are dismissed. If you do not pay back the entire balance, it will be considered a taxable distribution and you must pay tax and a 10 percent penalty on it that year. Then, when you retire, you pay tax a second time on those same dollars.