What Are Private and Personal Loans?
If you need cash fast and don't know where to turn to get it, perhaps a private or personal loan fits your needs. But get ready to pay a hefty price. Unless the source of funds is a friendly face, expect to pay a high interest rate.
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Private and Personal Loans
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The terms private and personal loans are interchangeable. A private or personal loan can come from a parent or friend. You agree in principle to pay the money back at some point in time with or without interest. However, good luck finding an individual willing to lend to you without securing the rights to your first born. The vast majority of private and personal loans come from financial institutions. Some banks and other financial institutions refer to their student loans as private loans because they are a supplement or alternative to federal student loans.
Unsecured Credit
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A private or personal loan is an unsecured loan or credit. This means there is no collateral backing the loan as in the case of a car or a house. The basis for making the loan rests on your financial credentials. Therefore, the underwriting criteria on private and personal loans are very strict and the loan amounts are small. The bank wants to make sure you can repay back the money with interest. Because private and personal loans use no collateral, banks charge higher interest rates. If your credit score is too low, don't expect to get a private loan from a bank. However, there are a number of firms that make private and personal loans if you have bad credit.
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Payday Loans
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A payday loan is another form of a personal loan. As the name implies, the basis for the loan is your employment income. In most cases, payday lenders do not conduct credit checks, but will verify if you work where you say you do. These loans are short term, such as one week. It is typical for the lender to take money directly from your checking account to repay back the loan or take the money directly from your paycheck. Interest rates on these loans are more than 100 percent.
Warning
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If you become late on a personal loan, you could end up paying twice the original borrowed amount after penalties and fees. If you do take out a private or personal loan, make sure that it is to improve your current financial situation, such as furthering your education.
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References
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