Collocated direct velocity feedback with ideal point force actuators mounted on structures is unconditionally stable and generates active damping. When inertial actuators are used to generate the control force, the system can become unstable even for moderate velocity feedback gains due to an additional -180 degree phase lag introduced by the fundamental axial resonant mode of the inertial actuator. In this study a relative velocity sensor is used to implement an inner velocity feedback loop that generates internal damping in a lightweight, electrodynamic, inertial actuator. Simulation results for a model problem with the actuator mounted on a clamped plate show that, when internal relative velocity feedback is used in addition to a conventional external velocity feedback loop, there is an optimum combination of internal and external velocity feedback gains, which, for a given gain margin, maximizes vibration reduction. These predictions are validated in experiments with a specially built lightweight inertial actuator.