The Disadvantages of Taking out a Private Loan

The disadvantages of taking out a private loan are many and the process is equally fraught with danger. Private loans are not subject to legislation or regulation in which personal loans from such as banks or reputable finance companies are and can therefore, in extreme circumstances, land the creditor in financial or even physical peril beyond their previous wildest imaginings.

Taking out a private loan is where one individual borrows from another, frequently – if not usually – without any form of legally binding contract being signed. This means that the two parties are essentially each taking the other’s word that in one instance the loan will be repaid as agreed and in the other that the terms of repayment and rates of repayment will remain as initially agreed.

A private loan may well of course be simply between two family members or close friends. These are the types of private loan perhaps least fraught with danger but this does not mean that they are in any sense of the matter risk-free. The inability of the debtor to make repayments, or the sudden need of the creditor to call in the loan – quite conceivably due to circumstances entirely beyond their control – can lead to family arguments, fall-outs among friends and in extreme circumstances, previously close relationships being destroyed forever.

A private loan, however, may also take the form of an individual taking a loan from an unauthorised and frequently illegal money-lender. The individual may resort to this option through desperation following their inability to secure conventional credit, or for whatever reason, they may simply have no desire to deal with reputable lenders. The dangers in this respect are two-fold. If the debtor falls behind in their loan payments, they may well find that the already exorbitant interest rate being charged increases steeply. If they are still unable to make the repayments, they may find themselves receiving a visit from the “debt collectors” of the unscrupulous lender.

The second danger in this latter instance is that there is absolutely no guarantee that the terms of the loan will remain fixed, whether or not the debtor makes payment on time. They may find themselves facing interest rate hikes on nothing more than a whim and at best, the repayment process taking considerably longer than they had envisaged and costing them significantly more.

The message regarding taking out a private loan is therefore that the individual should ponder the ins and outs extremely carefully prior to doing so. They should consider not only their alternatives but how desperately they need they money and whether the inherent risks are therefore justified. Only in this fashion can the dangers of taking out the private loan be minimised and the security of relationships and even physical safety adequately be protected.