Individuals who wish to consolidate credit card balances, need money for a large purchase or emergency, or are looking to take on a new project often use personal loans to meet their cash needs. Personal loans are usually not secured by collateral, and are typically issued by banks, credit unions and other financial institutions. Because they are based on your credit, they can be hard to get if you have negative marks on your credit report.
Another option, especially if your credit is less than perfect, is a private personal loan. The growth and availability of technology has made private personal loans and peer-to-peer lending increasingly common. The credit criteria for these types of loans tends to be more relaxed, but the result is that the interest rates on private personal loans are often higher. Understanding this alternative to a bank loan gives you a new credit option to consider.
What Is a Private Personal Loan?
A private personal loan is an unsecured loan that is issued by a private party rather than a bank, credit union or other formal financial institution. One of the most common types of private personal loan is a peer-to-peer loan through a website like Peerform, LendingClub or Prosper. These online market places bring together private lenders and borrowers outside of the formal hurdles and protections of the regulated banking system.
Pros of Private Personal Loans
The single biggest advantage of taking a private personal loan is that the lending standards tend to be lower because the lender is not a formal banking institution. These private lenders are most interested in your ability to prove that you have a recurring source of income that will enable you to repay the loan. This is typically established by providing either bank statements or several recent pay stubs.
Additional advantages of these types of loans includes a short application process and quick fast approval or denial. Because your credit plays a smaller role in the process, there is less for the lender to verify. So if you need money quickly, a private personal loan can be a good source of funds.
Cons of Private Personal Loans
The biggest drawback to taking a private personal loan is the cost of capital in terms of higher rates. Private personal loan rates are typically higher because the loan is approved based only on income and not credit history, which puts these types of loans at a higher risk of nonpayment. To offset this risk, the lender sets a higher interest rate. If a private lender makes enough high-interest-rate loans, even with a higher number of defaults, it should still be able to make money. The high cost of the loans that get paid back will cover those that do not. As the borrower, this added cost should be taken into account when deciding if this type of loan is right for you.
Where to Find Private Personal Loans
The fastest way to find a private personal loan is to search for private lenders online. This can be done by conducting a simple search or by visiting one of the major peer-to-peer lenders mentioned above. It is important to do some research before sharing your personal information with a party you find online to ensure its credibility, but this too can be conducted online.
Once you have selected a few options, you should carefully read the terms and conditions of that lender’s site. You want to make sure that you have the information needed to complete the application available to you and that the terms are acceptable to your circumstances. It is easy to rapidly click through some of these sites, but be cautious and thorough.
How to Apply for a Private Personal Loan
Once you have selected the lender that fits your needs, the process should be very straightforward: Simply complete the online forms and assemble the required documentation. This information can usually be submitted completely online. Once all of the information has been provided to the lender, you can expect a relatively quick decision. If you receive a positive response, you may be able to get your loan funded the same day.
Ultimately, there are advantages and drawbacks to taking out a private personal loan to meet your cash needs. While the process tends to be streamlined relative to applying for and receiving a personal loan from a bank or other financial institution, the interest rate you will pay for this type of loan will be significantly higher. Borrowers with weak credit are particular drawn to this type of loan because it is easier to secure, but you should weigh the cost of capital against your needs when deciding to take the loan.