A private loan from an individual is a direct borrowing arrangement between two people, with no bank or institution in between. The pros are speed, flexible terms and access for borrowers the banks decline; the cons are higher costs, thinner regulation and serious consequences if the agreement is poorly documented.
For brokers, these loans come up most often as a fallback when a client cannot pass mainstream credit assessment, so this guide sets out how they work, what they cost and what to check before recommending one.
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What Are Private Loans From Individuals?
The arrangement is simple: one person lends their own money to another on negotiated terms, secured or unsecured. It appeals to borrowers who sit outside standard policy, whether because of impaired credit scores, irregular income or unusual circumstances. Because no institution sits in the middle, the deal can be shaped around the borrower’s reality instead of a credit matrix.
Less institutional oversight does not mean lawless, though. Depending on the purpose and the parties, consumer credit laws, contract law and state-based rules on security registration can all apply, and that mix is exactly why the paperwork matters.
The Main Types
- Short-term loans: repayment within about twelve months, typically for urgent needs, usually priced at elevated interest rates.
- Secured loans: backed by property or other assets, which lowers the rate and raises the stakes, because default puts the asset at risk.
- Unsecured loans: no collateral and easier to arrange, but dearer, with recovery after default depending on the lender’s willingness to pursue legal action.
The Pros
Speed leads the list: with no committee approvals, funds can move in days, which matters for time-sensitive purchases or settlements at risk of collapsing. Flexibility follows: repayment schedules, rates and conditions are negotiable between the parties. And accessibility rounds it out: clients declined by banks still have somewhere to go, provided they accept the price of that access.
The Cons
Cost comes first here too: expect rates well above mainstream lending plus possible legal, valuation or administrative fees. Documentation risk runs deeper than people expect: informal agreements without a properly drafted contract, registered security or clear loan terms create disputes that are slow and expensive to resolve. And shorter repayment windows add pressure, so any client considering a private loan needs a realistic exit plan, usually a refinance once their position improves.
Where These Loans Fit
Common uses include bridging a property purchase, funding urgent repairs, covering short business cash-flow gaps and consolidating debts for borrowers who cannot access mainstream products. Small-business owners sometimes prefer a private arrangement over applying for formal business loans, particularly when speed matters more than cost. What rarely justifies one is long-term structural borrowing, where the pricing compounds into a genuine hardship risk.
Checks Before You Recommend One
Confirm the lender genuinely owns the funds and understands what lending means legally, including tax consequences on interest earned. Have the contract drafted or reviewed by a solicitor. Register any security properly. Check which regulatory regime applies to the loan’s purpose before assuming consumer protections exist. Most importantly, stress-test the client’s exit: if the plan relies on a future refinance, write down what has to change for that refinance to succeed.
This week, if a declined client asks about private options, run the same three checks you would want documented on your own file: verify the lender and funds, get the contract professionally reviewed and map the exit plan with dates. If any leg fails, the honest answer is that this client should wait rather than borrow.
