P2P Lending: Definition, Benefits, And Limitations

Ever feel stuck between the rock-bottom interest rates on savings accounts and the sky-high rates on traditional loans? P2P lending might be the answer you have been looking for. This innovative financial tool is shaking things up by connecting borrowers directly with lenders, offering a win-win for both sides.

In this blog post, we will explore the details of P2P lending, how it works, and its benefits.

P2P lending, or peer-to-peer lending, is a way for people to borrow and lend money directly to each other, bypassing traditional banks. It happens through online platforms that connect borrowers and lenders.

How it Works

• P2P lending eliminates the intermediaries and banks to connect borrowers directly with lenders through online platforms. The process is as follows:
• The borrower creates an account on a P2P lending platform and submits a loan application specifying the amount and purpose of the loan.
• The platform analyses creditworthiness through various checks, including credit score, income verification, and sometimes social media activity.
• Based on this assessment, the platform assigns the borrower a credit rating and sets an appropriate interest rate.
• The platform lists the borrower’s loan profile and details such as loan amount, interest rate, credit rating, and purpose.
• Investors browse these listings and choose loans to fund based on their risk tolerance and desired returns.
• Once the lender funds the loan, the platform disburses the money to the borrower, who makes fixed repayments, including principal and interest.
• The P2P platforms generally handle all the administrative tasks linked with loan servicing, including collecting repayments, and chasing late payments. Generally, they take a cut from both the lender and the borrower for their services.

P2P Platforms in India

There are plenty of P2P lending platforms operating in India. The most popular P2P platforms in India are mentioned below:

• Faircent is India’s first P2P lending platform to receive an NBFC P2P license from the RBI. It offers various investment options across multiple tenures, with interest rates ranging from 8.5% to 12%.
• Lenden Club – It is one of India’s largest P2P lending platforms. It offers loans for several purposes with interest rates starting from 6.5% per annum. Founded in 2015, the platform has over 20 lakh investors and offers several lending options.
• Lendbox is a popular P2P lending app with flexible liquidity options. It was founded in 2015 and is regulated by the Reserve Bank of India.
• India P2P – India’s other well-regarded platform offering investors the opportunity to earn up to 18% per annum by investing in retail loans.

When choosing the P2P platforms, one should keep these things in mind:

• The interest rates offered by the P2P platform.
• The fees charged by the platform for providing its services.
• The types of loans offered and the repayment terms.
• Platform’s history and track record.

Regulation in India

The Reserve Bank of India (RBI) regulates P2P lending in India. In 2017, the RBI issued guidelines for P2P lending, known as the Master Directions for NBFC Peer-to-Peer Lending Platform. These guidelines aim to ensure the orderly development of the P2P lending sector and protect the interests of both the borrowers and the lenders.

Some key points about P2P lender regulation are as follows:

• Only registered NBFCs with a specific license for P2P lending can operate as P2P platforms.
• Platforms must meet specific requirements, such as sound technological structure, and proper KYC procedures for borrowers and lenders.
• Platforms cannot accept deposits from lenders or provide any credit enhancement or guarantee on loans.

Benefits of P2P Platforms

For Borrowers

• P2P platforms often eliminate bank overhead costs, leading to lower interest rates for borrowers than traditional loans offered by scheduled banks.
• P2P platforms leverage technology to streamline loan applications, leading to faster approvals than banks.
• Borrowers with limited credit history or those who would not qualify for a traditional loan may find success with P2P lenders.
• Some P2P platforms offer more flexibility regarding loan amounts and repayment options than banks.

For Lenders

• P2P loans can offer higher returns on investment than traditional savings accounts interest, fixed deposits, or bonds.
• Lenders can spread their investments across multiple loans to mitigate risk.
• These platforms provide detailed borrower information, giving lenders more control over their investments.

Limitations of P2P Platform

For Borrowers

• P2P platforms often cater to smaller loan sizes compared to traditional banks. They might not be suitable for borrowers needing significant funding.
• The P2P platform may charge borrowers several fees, such as processing and admin fees, which can increase the overall rate offered by the lenders.

For Lenders

• P2P investments are less liquid than traditional assets like stocks or bonds. You may have to wait for the loan term to end to access your funds.
• There is no 100% guarantee that Borrowers will repay the loan, regardless of their credit score. Things can go wrong, and borrowers may default on their loans. Further, P2P platforms may not have the same safeguards as banks in such situations.

Read Also: Top 10 personal finance lessons for self-learning

Conclusion

P2P lending offers a compelling alternative to traditional finance, providing lower borrowing rates and higher returns. Whether you are a borrower seeking a better deal or a lender looking to maximise returns, P2P lending offers a chance to rethink how your money works for you.

However, it is essential to carefully consider your risk tolerance and conduct thorough research before diving in, as there is always a risk of default, even with the platform assessment. The success of P2P investment hinges on the reliability of the chosen platform. Research their track record and security measures.

Frequently Asked Questions (FAQs)