What is a Private Personal Loan?

You're flat broke until your next payday when your car's transmission bites the dust. Your credit isn't the best and you can't ask your brother for another loan. Help may be available in the form of a private personal loan also called a person-to-person loan or peer-to-peer loan. These loans are made by individuals instead of banks and other financial institutions. Private lenders review your borrower profile online; your loan cost is based on your credit scores and other perceived risks. Your interest rate may be higher or lower than rates for comparable "traditional" personal loans. In general person-to-person lenders charge a loan origination fee of one percent of the loan amount. If you borrow $1,000, your loan fee would be $10.

Private personal loans are not the same as payday loans or cash advance loans, which are short-term loans that carry very high interest rates and fees. A private personal loan is typically an installment loan that's repaid over a period of years depending on lender policies and the amount you borrow.

Private Personal Loan: Things to Know

Borrowers with poor credit may prefer to seek financing through a private personal lender. Private personal lenders are not driven by uniform policies of banks and other financial institutions. They can make case-by-case lending decisions that provide flexibility needed for approving loans that financial institutions cannot approve.

  • Taking out a private personal loan can help you rebuild bad credit. Although you can build up a strong credit score with years of on-time payments, your good credit can disappear as soon as you become ill, lose your job or experience unexpected expenses. A private personal loan can help reestablish your payment history. Many private personal loans are handled through online platforms that connect potential borrowers with lenders. These companies typically report payments to credit bureaus; you can reestablish credit by making payments to your personal loan lender on time.
  • Doing business person-to-person: Although you won't meet your private personal lender face-to-face, you'll be doing business with an individual. For those who prefer the simplicity of person-to-person dealings, a private personal loan may be a good option.
  • Online platforms that connect private personal lenders to prospective borrowers may be subject to federal, state, and local regulation governing consumer lending practices. This affords borrowers and lenders certain protections under federal, state, and local law.
  • Interest rates and loan fees are usually established by online lending platforms. Interest rates are typically based on your credit score and other perceived lending risks.
  • Research person-to-person online lending platforms as policies and requirements such as minimum credit scores can vary.
  • Ask about prepayment premiums. Paying off your person-to-person loan early may save on finance charges, but a prepayment premium can reduce or eliminate this benefit.
  • When comparing interest rates for person-to-person loans to your credit card rates, don't forget to compare person-to-person loan rates to rates for traditional personal loans.
  • Check out and compare person-to-person lending platforms through the Better Business Bureau.

Borrowing from family and friends may have its benefits, but it can also cause problems and even the loss of relationships. The person-to-person lending model puts enough distance between lender and borrower that both can benefit and the loan can be repaid without the complications of personal relationships.

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