If you’re in debt, you’re not alone. Experian reports that the average U.S. consumer pays $1,237 in monthly debt across their various obligations. (1)
Meanwhile, median weekly earnings for American workers were $1,196 during the second quarter of 2025, per the U.S. Bureau of Labor Statistics. That’s an annual salary of $62,192, assuming 52 weeks of work. And when we divide that by 12, it’s a monthly income of about $5,183.
This means the typical American may be spending about a quarter of their monthly income on debt payments alone.
But while digging yourself out of debt may be hard when you earn a typical wage, the task should be a lot easier when you have a large salary. That’s why Dave Ramsey was appalled when a caller recently asked if he should take out a 401(k) loan to pay off his roughly $33,000 in debt. (2)
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As Dave from Long Island explained, his household income is $205,000. Ramsey felt that he was making more than enough to rid himself of debt in under a year, given the relatively small amount owed.
"Dude, why don’t you just get on a budget?" Ramsey said. "Clean this mess up. Quit trying to find a hack."
A plan with a flaw
As Dave explained to Ramsey, his debt comes from a variety of sources. He owes:
- $13,323 in back federal taxes
- $13,250 on one credit card
- $4,909 in a car loan
- $1,138 on another credit card
Dave’s logic was that since he could borrow from his 401(k) at an interest rate of 5%, it made sense to do that, as opposed to paying a higher interest rate on his remaining debts. His higher credit card balance, as he explained, had a roughly 27.8% APR, well above the average rate of 22.83% from the latest Federal Reserve consumer credit report.
But Ramsey was vehemently opposed to Dave borrowing more money to pay off debt, given his income.
“If you want to work a different plan, you called the wrong place because we’re going to get you out of debt so that you can build wealth,” he said, “so that you can change your family tree and be outrageously generous.”
He told Dave to spend the next 12 months paying only for essentials, and to put the rest of his paycheck toward debt. He even suggested that Dave stop saving and investing until he’s debt-free — a very different course than borrowing from retirement savings.
Ramsey advised Dave to start with the IRS debt, and then pay off the rest from the smallest to largest balance, a strategy he often recommends called the snowball method.
Read more: How much cash do you plan to keep on hand after you retire? Here are 3 of the biggest reasons you’ll need a substantial stash of savings in retirement
The pros and cons of a 401(k) loan
Dave’s idea to borrow from his 401(k) wasn’t great for his situation, according to Ramsey. But, what if you have a lot of debt and don’t make nearly as much? It may not be feasible for you to pay off all of your debt simply by cutting back and spending more carefully. So, you may find yourself contemplating a 401(k) loan if it allows you to settle your debt at a lower interest rate.
It’s a good idea in theory. Not only can you lower the interest rate on your debt, you’d also be paying yourself that interest, since it’s your money. However, there are some risks associated with a 401(k) loan that you need to know about.
First, while the interest rate may be affordable, the sum you’ve borrowed is money that will no longer be invested. Worse yet, if you’re unable to pay back your 401(k) loan, there could be big consequences.
You might think you have plenty of time to repay your 401(k) loan, the typical period is five years, but there is a catch: As Fidelity points out, if you leave your employer — whether because you get a new job or you get laid off — you would end up having to repay your loan in full in a short time frame.(3)
If you don’t pay your balance in time, it’s generally treated as a withdrawal, which could leave you subject to taxes. And if you’re not yet 59½, you’ll face a 10% early withdrawal penalty on top of that.
Not only that, you’ll also lose out on the growth you would have otherwise gotten on that money.
Let’s say your 401(k)’s annual return is 7%, a bit below the stock market’s average, and you take a $12,000 loan from your 401(k) that you intend to repay, but don’t manage to do so.
If you take that loan at age 45 and retire at age 65, it could mean retiring with about $46,400 less. The extra $34,400 is foregone gains on the $12,000.
At the end of 2024, 13% of 401(k) plan participants had an outstanding loan against their balance, reports Vanguard. (4) And the average loan amount was $11,067. So while it’s clear that 401(k) loans are not uncommon, that doesn’t make them the right choice.
Of course, that doesn’t mean a 401(k) loan is the wrong choice for you. If your job is very stable and you have no plans to leave it, and borrowing from your 401(k) is your cheapest option for paying off debt consolidation by far, then it could make sense.
It could also make sense to take out a 401(k) loan for an emergency expense if you don’t have enough regular savings to pay for it. But you may want to talk it over with a financial advisor first, as they may be able to suggest other methods of debt consolidation that leave your savings intact.
If you are going to borrow from your 401(k), make sure you understand the rules, including your repayment period and what happens if you end up leaving your job. It’s important to go in with all of the right information so there are no surprises down the road.
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Article sources
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Experian (1); The Ramsey Show (2); Fidelity (3); Vanguard (4)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.