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What Is a Loan?

Good question!

A loan is money that is borrowed with the expectation that it will be paid back, typically with interest, in monthly installments. 

Loans are offered by financial institutions such as banks, credit unions, online lenders or government institutions. There are many kinds of loans, such as mortgages, student loans, business loans and personal loans.

But how do loans actually work? Good question!

How do personal loans work?

Personal loans are generally unsecured loans. What this means is that the borrower doesn’t need to put up any possessions, such as their car or home, to qualify for the loan.

If you’re planning on applying for a personal loan, a good rule of thumb is to check your credit score. Generally, you want a credit score of 660 or higher. Higher credit scores indicate more creditworthiness and less risk to the lender.

How can you use an unsecured personal loan?

Unsecured loans are good for many things.

Depending on the terms of the loan you are considering, a personal loan could be used to pay for expenses such as a home renovation, an upcoming wedding, a vacation or to consolidate credit card debt.

Debt consolidation loans

One of the most common uses for a personal loan is debt consolidation. Debt consolidation is the process of combining multiple outstanding debts into a single new debt that the borrower pays back in monthly installments.

When you use a personal loan to consolidate your debt, you are taking out a new loan to pay off your existing debt. For example, let’s say you have four credit cards, each with $10,000 of debt. If you take out a $40,000 debt consolidation loan, you can pay off all your existing debts. Then, you’ll need to pay back the loan with interest in monthly installments (can also be referred to as an installment loan).

Why would this be better than just paying back the credit cards one by one? Credit cards generally have higher interest rates as compared to those on personal loans. By consolidating your debt with a lower-interest personal loan, you could save money.

Yes, you could save money and pay down debt at the same time.

We’ve developed this personal loan calculator to help you see how much you could save by consolidating your credit card debt with a personal loan from Marcus by Goldman Sachs®.

Home improvement loans

Another use for a personal loan is using the funds to update or renovate your home.

Let’s say you’re planning a move this year, but you want to update your kitchen before putting your home on the market. If the cost of renovating your kitchen is $25,000 but you only have about $10,000 saved up for the renovation, a personal loan of $15,000 could help cover the remainder of the costs.

If you were planning on putting those costs on a credit card, you could end up spending more money on interest than if you used a personal loan. For example, if you decide to spend $25,000 on your home renovation and put all the expenses on a credit card with a 16.99% interest rate, you would spend over $10,000 in interest – assuming it takes you four years to pay off the balance. But, if you find a lower-interest home improvement loan, you could save money on your entire project.

What else is there to know about personal loans?

Life can be expensive. A personal loan can be an affordable way to bridge the gap — whether it’s to help fund your dream wedding or to pay for the costs of moving.

If you’re interested in a personal loan, take a look at the personal loans offered by Marcus by Goldman Sachs®. Our personal loans have fixed interest rates, and — best of all — we never charge fees. Ever.

Learn more about our no-fee, fixed-rate personal loans

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.