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Some times you have no choice. It depends on who your 401K is with and what the rules are. Mine is Federal so I can only speak from that end. I borrowed from mine when I needed a car and couldn't get financing due to credit problems at the time. You can only borrow against the money you have personally contributed and not what your agency put it. When you borrow, you no longer earn interest on that amount until it is repaid. As you make the payments, the amount of payments is put back into an earning status. You are also required to pay a percentage in interest but the interest as well as the principle goes back into your account. I guess it's their way of still allowing your to earn some money on the amount you borrow. The problem with borrowing, of course, is that you are only earning say 4-5 % on the money your borrow instead of whatever the fund is earning. Like I said, this is for federal 401k and although it is a last resort load, sometimes you have no choice. You can always pay it back early or faster if your circumstances allow.
You'll be double taxed on the interest you pay to yourself. It's a great deal for the government but not for you. The interest you pay back to yourself is from your earnings which you have paid tax on. You will be taxed again on the same money when you withdraw from the 401k after you retire.
