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The 401k is a qualified retirement plan that allows eligible employees of a company to save and invest for their own retirement. Only an employer is allowed to sponsor a 401k for their employees. You decide how much money you want deducted from your paycheck and deposited to the plan.
When you borrow funds from your 401k plan you are borrowing your own money. You repay the loan from your payroll. When you pay interest for this loan you are actually paying yourself the interest. If you leave the company they give you a set amount of time to repay the loan and if you do not it is considered a distribution from the plan. Keep in mind that the plan and plan administrator have certain guidelines on how much you can borrow and requirements when you can borrow. They may not permit loans under a certain amount or over a certain percentage of the account value.
401(k) plans may or may not allow loans, or may allow loans only for specific reasons. If you are permitted to take a loan, the amount of the loan will be limited to whatever the plan provides, but not more than 50% of your vested account balance. The loan is also required to be repaid over a period of not more than 5 years, unless it is going to be used to purchase your principal residence, in which case there is no limit under the law, but plans will typically limit home loans to no more than 15–20 years. Payments of principal and interest must be no less frequent than quarterly, although most plans will require repayment to be made out of paychecks. The loan is required to have a commercially-reasonable interest rate — e.g., no interest-free loans — and be secured by a pledge of your vested account balance. Repayments are usually (but not always) credited back to your account. A default in payments — which will normally not occur if repayment is coming out of paychecks — will cause the outstanding balance of the loan to be taxable in the year of the default. If you are eligible to receive a distribution from the plan, the loan can be offset against your account balance. Otherwise, the loan will continue to accrue interest, which you will have to pay, until you either pay off the loan, or are eligible to offset the loan against your account balance.