P2P lending

Peer to peer lending, also known as P2P lending, is an alternate financing model that enables borrowers to get unsecured personal loans from individual lenders. Peer to peer lending platforms keep a list of verified borrowers, and the investors can see their details before lending them their corpus. Furthermore, investors also have the option of diversifying their investments, by lending relatively smaller amounts to various borrowers. The interest rates of such peer to peer loans are higher, as compared to banks and NBFCs.

The P2P lending sector in India has witnessed a high growth rate in the last few years. Some of the popular platforms that provide the Peer to Peer lending facility are:

• Lendbox

• Faircent

• i2iFunding

• OMLP2P

• LenDenClub

• i-Lend

Peer to Peer (P2P) lending is a high-risk form of lending as most of the borrowers on these P2P lending platforms are those who are not eligible for a loan offer from the formalised sector- banks and NBFCs. Therefore, the interest rates and the processing fees charged by these platforms are relatively higher. You may refer to the following table to get an idea of the interest rates and the processing fees charged by the Peer to Peer lending platforms:

Disclaimer: The rates mentioned above are subject to constant change. You must always check with the lender before applying. Additionally, the final interest rate applicable to you will depend on factors such as your repayment tenure, your age, your monthly income, and your CIBIL score

P2P lending is primarily aimed at people belonging to the lower income group. Thus, CIBIL score and monthly income are not a prerequisite here. The eligibility parameters change depending on the lender.

While peer-to-peer lending is significantly different from lending from traditional financial institutions like banks and NBFCs, the working model of these P2P lending platforms is fairly simple. One can register on these P2P lending platforms as either a borrower or a lender (investor). If you register as an investor, you can invest your money on the platform and earn a fairly high interest rate on the invested capital. The P2P platform then lends the money collected from the investors to the users who registered on the platform as borrowers. This is how the lending platform matches the borrowers with the investors and it is a win-win situation for both.

To protect the interests of lenders and borrowers, the Reserve Bank of India (RBI) regulates Peer to Peer Lending platforms in India. The Reserve Bank of India (RBI) has made it mandatory for all existing P2P (Peer to Peer) companies to apply for a Peer to Peer Lending License in order to continue operating as a P2P platform.

As per RBI guidelines, a lender cannot invest more than Rs. 10 Lakhs across any Peer to Peer platform. Apart from that, the regulating body has also set a lending limit of the maximum loan amount that a borrower can obtain through such platforms, capping it at Rs.50,000. 

The active participation of the Reserve Bank of India in the functioning of Peer to Peer Lending platforms helps increase the credibility of such companies.

Here are a few crucial requirements to get a P2P lending license in India:

• A minimum capital of Rs. 2 Crores.

• The company should have a proper hierarchy of CEOs, managers, workers and more. The business must also have a physical presence in the country.

• These online platforms must submit regular reports relating to their financial positions to the RBI.

• The P2P platform can act as an intermediary between the lender and borrower by helping them communicate. The platform cannot reflect the borrowing amount in its balance sheet.

• The platform must put in the needed risk management plan.

To get a loan through the peer to peer lending system, one has to follow the following steps:

• First, one has to register themselves as a borrower, which can be done by filling out the online form on the P2P platform.

• The prospective borrower has to pay a one-time, non-refundable registration fee, which can range from ₹100 to ₹1,000.

• They then have to upload scanned copies of their personal documents, such as PAN card, passport, driving licence etc., along with their salary slips for the previous 3-6 months if they are an employee, while other professionals have to submit a copy of their income tax returns.

• Furthermore, certain platforms might require the borrower to divulge links to their social media accounts, such as LinkedIn, Twitter and Facebook, in order to evaluate their profile, job stability and social behaviour.

• After registering on the platform, the P2P risk assessment team evaluates the borrower’s risk profile. If the borrower is deemed qualified for availing peer to peer loans, their profile is listed on the platform, along with their loan requirement.

P2P lending allows investors to earn interest on the money they lend. Thus, interest income from P2P lending is taxable, just like interest income from other investment instruments.

Interest earned from peer-to-peer lending is classified as 'Income from Other Sources'. Thus, it is added to the lender's income and taxed according to the tax bracket in which the lender falls. So, if someone is in the 30% tax bracket, the interest earned will be taxed at 30%.

• Be Realistic: As a borrower, one shouldn’t overshoot, and should be realistic with their requirements. The lenders would carefully consider their debt-to-income ratio, along with their credit history and their income stream.

• Be Thorough with the Registration and Application: It is important to proofread one’s application for a peer to peer loan, and ensure that the details being provided are accurate.

• Ensure Your Credit Score Doesn’t Get Affected: The peer to peer platforms send the loan information to credit information bureaus. Thus, if the borrower defaults on peer to peer loans, it will affect their credit history and credit score, making it difficult to procure loans in the future.

Peer to peer lending is an alternate financing model that connects verified borrowers that require unsecured personal loans with investors who seek higher returns on their investments. However, if you’re not ready to venture into the peer to peer lending space just yet, here’s an alternative: opt for a Personal Loan on the online financial marketplace - Bajaj Markets. You can avail personal loans of amounts up to ₹50 Lakhs at attractive interest rates, The application process is seamless, requires minimal documentation and loan approval takes less than 2 minutes.