Peer to Peer 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 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.

According to the Economic Survey 2017-18, the small and medium-sized enterprises (SMEs) were underserved by the formal financial sector, receiving just 17.4 percent of the credit or loans disbursed by the banks as of November 2017, with the figure being Rs. 26,041 billion (US$ 366 billion). Furthermore, it is estimated that the peer to peer lending sector will grow into a US$5 billion industry by 2023, as peer to peer loans continue to fill the void left by the traditional finance industry.

Features of Peer to Peer Lending

The amount being borrowed, and the tenure for repayment of the loans differ from one platform to the other. Furthermore, according to RBI’s guidelines, a single lender cannot lend more than Rs. 10 lakhs across various platforms, and cannot lend more than Rs. 50,000 to a unique borrower. The peer to peer lending sector has seen a considerable growth, with its market size estimated to be Rs. 300 crores. The following are some key features of peer to peer lending.

  • Peer to peer is an online platform, which matches verified borrowers with the investors (lenders).

  • To get a peer to peer loan, the borrower and the lender need not develop a relationship before the lending or the borrowing process.

  • The minimum loan tenure is 3 months, while the maximum tenure is 36 months.

  • The investors can save more by lending amount at high interest rates, while the borrowers can get peer to peer loans at interest rates lower than those offered by the traditional financial services.

  • There is no involvement of any financial institution or an intermediary between the borrower and the lender.

  • The borrowers and the lenders have the freedom to choose their preferred option of borrowing and investing.

How to Get Loan through Peer-to-Peer Lending System

To get a loan through 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 the online form on the P2P platform.

  • The prospective borrower has to pay a one-time, non-refundable registration fee, which can range from Rs. 100 to Rs. 1000.

  • They then have to upload scanned copies of their personal documents, such as PAN card, passport, driving license 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 and verifies the profile. Considering the borrower is qualified for peer to peer loans on the platform, their profile will be listed on the platform, along with their requirement.

Benefits of P2P Lending

Peer to peer lending provides numerous benefits to the investors, making it an attractive investment option. Some of the benefits are listed below.

  • Attractive Interest Rates: For the investors, peer to peer lending enables them to provide loans at attractive interest rates on P2P platforms, making it an attractive investment option. Similarly, borrowers can get loans at lower rates as compared to traditional lenders such as banks and NBFCs, and the interest rates are fixed at competitive rates.

  • User-Friendly Experience: Considering the fact that peer to peer lending system is operated on an online portal, the application process is extremely convenient and quick. Furthermore, the lenders get access to the borrowers’ profiles, and they can choose the borrowers according to their personal information.

  • Ideal Substitute For Traditional Lenders: Peer to peer loans provide attractive returns to the investors, while the borrowers get access to loans at rates less than what the traditional lenders offer, making it the ideal substitute for formal financial lenders.

  • No Security Or Collateral Required: A peer to peer platform is an unsecured loan provider, and does not require any security or collateral unlike banks. Thus, the loan process is accelerated, and the borrowers get access to loan amounts faster.

Key Points to Check as a Borrower

As a borrower, one has to carefully consider the following points:

  • Be Realistic: As a borrower, one shouldn’t overshoot, and should be realistic with their requirements. The lenders will 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.

Conclusion

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. By providing loans at flexible rates, it has become an attractive investment option for the lenders, while the borrowers get loans at interest rates less than those offered by banks and NBFCs. Furthermore, the peer to peer lending industry is expected to grow into a US$5 billion industry by 2023, with its simplified application process, lower interest rates and quick disbursal of loans driving its growth.

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