There are some plans with a provision that if a 401(k) loan is outstanding, you cannot make new deposits, only payments to the loan. This would keep you from getting any matched funds, potentially giving an effective rate on the loan into the 100%'s. e.g. you borrow $10K for 5 years. You lose $5K/yr in matching, every year the loan is outstanding.
Aside from the above, ask 2 questions, separately.
- Would I be happy with a 6.5% return on my 401(k)?
- Does a loan at 6.5% make me better off? i.e. can I borrow at 6.5% and put the money to good use? I'm thinking paying off the credit card bill that's running 24% for the balance of your daughter's kidney transplant.
If both of the above are "yes", you just need to consider the risk that if you lost you job or even changed jobs, the loan needs to be paid back.
My informed opinion is that one 'fix' that 401(k) accounts need is the ability to maintain a loan post employment. It's awful to consider that one might be offered a better job, higher pay, but realize they are tied to an outstanding loan and would have to jump through hoops to raise funds to pay it back, transfer the 401(k) to new employer, then take out new loan. A transfer of the 401(k) with the loan in tact should be an option.
Similarly, if one lost their job, the payback is just an extra burden. The loan should remain, and the administrator assess a small fee for processing it outside the normal payroll deduction. Very small fee.
And, yes, the answer to the question title, is that the interest charged goes back to you.