If you’re having issues with securing a loan from a traditional lender, you might want to consider taking out a private loan from a private loan lender. However, suppose you were to search “private loans” online. In that case, you’d be greeted with numerous pages discussing private loans in the context of post-secondary education, mostly referring to private student loans.
In this guide, we’ll discuss private loans, what they are, and what different types of private loans are there. We also included a section about all the important information you should know before taking out a private loan and how to choose the best possible private loan for your financial situation.
Want to get started right away? Simply fill in our online inquiry form and see if you’re eligible for a private loan.
What Are Private Loans?
The true definition of private loans states that there are loan options that come from private lenders instead of traditional lenders, such as federally-governed banks and credit unions. Thus, unlike federally-backed loans, which have terms set by law, private loans have terms that are mostly determined by the lender, with interest rates that are only capped by the government.
Private loans are basically personal loans provided by private lenders, which can be used for a variety of purposes, including funding post-secondary education, large personal purchases, or consolidating debt. They’re personal in the sense that the lender doesn’t impose any limitations on their use, allowing you to use the loan as you see fit.
Since they’re not so strictly governed by federal law, these loans often come with less strict requirements in terms of credit score, loan application, loan approval, and loan repayment. It’s worth noting that these loans can be both secured and unsecured, implying the presence or absence of assets used as collateral to secure the loan.
This directly influences the loan interest rate you might receive on the loan (which might be a variable interest rate or fixed interest rate), as well as your repayment terms and the loan amount you can secure.
Private lending is a good option if you can’t secure a loan with traditional financial institutions or if their approval criteria are too hard to meet. This means that you’re more likely to secure a loan with a private lender, albeit at a slightly higher interest rate.
Benefits of Private Loans
Private loans offer numerous benefits compared to more traditional loans, some of which include the following:
- Faster application process: If you’re in need of some quick cash, the application and approval processes associated with private loans are much faster compared to traditional lenders and usually happen on the same day or within the next business day.
- Specialized loans: Since personal loans can’t be used as private education loans or student financial aid, private lenders often cater to those looking for specialized loans, like private student loans, that you might not be able to acquire through a traditional lender. This is ideal for borrowers who may have bad credit or are looking for faster funding.
- Lower credit history requirements: A private loan lender usually has less strict credit score requirements, which allows even those with bad credit to apply for the loan. It’s worth noting that the lender might still perform a soft credit check (which won’t affect your credit) to help determine your eligibility and creditworthiness and establish appropriate interest rates and repayment options, with lower interest rates reserved for those with good credit.
- Fewer requirements: Private lenders are often less stringent with their loan eligibility requirements and require fewer documents than banks. You’ll still have to submit your private information, bank account, and proof of income, as well as prove that you’re a permanent resident of the state in which you’re obtaining the loan. There are some loan-specific requirements, like the cost of attendance for university and college loans and car titles for car title loans.
- Flexibility: Personal loans are flexible in more ways than one. Not only can you use the money for a wide range of things, but private lenders will offer more flexible repayment plans and easier refinancing if necessary.
Different Types of Private Loans
Not all loans are the same; while personal loans are flexible in terms of their use, use-specific loans, such as mortgages, often mean that you don’t even see the loan funds, only the proof of transaction. In other words, some loan products make more financial sense than others. You’ll find a comprehensive breakdown of different types of private loans below:
Private Personal Loans
Private personal loans are unsecured loans that don’t require any collateral in the form of a valuable asset, such as property, vehicles, or valuables, to secure the loan. This means that the loan is granted based on your eligibility and promise to repay the loan, noted down in the promissory note.
Since they’re not backed by collateral, your eligibility for the loan is based on your credit score, which is also used to determine interest rates, loan terms, and associated costs, such as prepayment and origination fees.
Due to the higher received risk by the lender, private personal loans usually come with higher interest rates and less favorable loan terms, which affect the total cost of the loan and dictate the amount you’d have to pay through monthly payments.
These loans are mostly used to cover credit card debt or to consolidate debt. It’s also worth noting that there are short-term private personal loans, and those usually come with even higher interest rates and costs.
Private Student Loans
As their name implies, these loan programs are granted by private student loan lenders and usually have less stringent requirements than federal student loans. They’re great options, as you don’t need to have good credit or a co-signer, but they often come with certain limitations.
For example, the interest rates associated with private student loans are higher compared to federal student loans, and such loans can’t benefit from income-driven loan payments and loan forgiveness programs.
Private Loans for Bad Credit
Private loans for bad credit are specifically designed for borrowers who can’t obtain a loan through traditional lenders due to poor credit history. Traditional lenders don’t usually approve loans to borrowers whose credit score is lower than 670 on a FICO score scale, as they’re often deemed as risky borrowers who are more likely to default on the loan.
On the other hand, private lenders often have lower credit score requirements, which means that they’re likely to approve unsecured private loans for bad credit to borrowers with a FICO score in the 580-670 range. Some lenders might even lend to borrowers whose credit falls short of 580 on the FICO scale. Any score below 580 constitutes bad credit, hence the name.
These loans also come with higher interest rates and less favorable loan terms due to higher perceived risk, but they’re still viable financial solutions for borrowers who can’t obtain a loan from traditional financial institutions because of blemished credit reports.
Private loans also come in various shapes and sizes; they can be secured and unsecured (though the latter is more common) and come in the form of payday loans, installment loans, and car title loans.
Things to Know Before You Apply for a Private Loan
Private loans are often unsecured loans that don’t require any collateral in the form of valuable assets, which eliminates the possibility of the lender repossessing your property in the case of default. However, lenders still need to establish your creditworthiness and eligibility, and given the absence of collateral, your credit score will be the biggest eligibility factor.
Know Your Credit Score
Your credit score is a quantifiable reflection of your financial responsibility and creditworthiness. It’s affected by even minute financial decisions or mistakes, like missing a payment date on a utility bill, which is why lenders typically rely on your credit score to determine your loan eligibility.
For example, if your credit score is 670 FICO or higher, the lender will offer lower rates and certain benefits, with the lowest rates reserved for those with the best credit. Unfortunately, this also means that borrowers with suboptimal credit don’t pass the credit check, and traditional lenders usually deny such loan applications or demand unreasonably high interest.
This is why it’s important to know your credit score, even if you’re applying for a loan that’s advertised as a no-credit-check loan or an emergency loan for bad credit. If you’re unfamiliar with the FICO score, here’s a breakdown:
- Any score below 580: Poor credit
- 580-669: Fair credit score
- 670-739: Good credit score
- 740-799: Great credit score
- 800+: Excellent credit score
While catering to customers of all credit scores, private lenders typically approve of borrowers with fair and poor credit and are more likely to approve their loan applications and provide loan funds. If you have a suboptimal credit score, you should look for a private loan or a private loan for bad credit.
The good thing about these loans is that some lenders typically report complete repayment to credit bureaus. This means that your credit score is likely to increase as you repay the loans, which is particularly important if you’re treating a private loan like a debt consolidation loan.
You’re Not Obligated to Sign
Note that you’re not obligated to accept any loan offers. When you’re securing a loan, you typically go through the application process, on which you submit the necessary documents for the private lender to review and base their decision.
Once the information is reviewed and the lender approves the loan, they typically contact you with the loan agreement, which includes all the necessary details about the loan, such as loan amount, interest rates, repayment terms, annual percentage rates, monthly installments, and all other important information.
However, you’re not obligated to accept the loan agreement and offer if you don’t like it, or you’ve secured a better offer along the way.
Read the Fine Print
It’s really important to read your loan agreement thoroughly, as it usually contains fine print with key information that lenders are legally bound to inform you about but are trying to hide or at least make less visible.
Some of that information might include details about prepayment penalties, mentions of origination fees, requests for automatic payments, minimum loan amounts, credit inquiries, annual percentage rates, or high-interest late payment penalties.
Obtaining a loan is a major financial transaction that could potentially have broad implications on your finances if you fail to understand what your obligations are. It’s important to thoroughly read the loan agreement before signing. Remember, you’re not obligated to sign it if any of the terms seem unreasonable.
Choosing the Best Private Loans Options
Choosing the best private loan option comes down to comparing different private lenders and securing the loan that fits your financial situation the best. Fortunately, the internet allows you to compare different lenders online without having to call or walk to their respective branch offices.
Not all lenders are the same, and some may offer loans with interest that might be too high for you, while others might not have as stellar reviews or don’t offer the loan product you need. It’s also a good idea to ask friends and family about lender recommendations.
However, even this approach is time-consuming since you need to review different lenders, submit several applications, compare different offers, and respond to secure the loan. Fortunately, we at Primo Personal Loans offer a solution. Simply submit an application at our website, and we’ll share it with the lenders in our network.
The lenders will review your application and contact you with their respective loan offers. It’s not uncommon to receive several offers that allow you to choose the one that best fits your financial needs.
Summary
Personal loans are a fantastic financial solution for those who can’t secure a loan from a traditional, federally-backed lender. If you’re interested in securing a private loan, don’t hesitate to fill out a loan inquiry form. We will help you find a lender that fits your needs.
