A beginner’s guide to P2P Lending

(source: Inc42)

What do people do when they need money? They borrow it. And the premier source of money for them is a bank. Banks are a prime source of debt financing. Bank loans have a pre-set interest rates and have to be repaid at fixed intervals i.e., monthly, quarterly or annually.  If you fail to do so, the bank has full rights over the seizure of collateral or can pull you to the court.

But this process does not end up being as easy as it looks. Processing borrowers loan application by a bank takes forever. The red tapes make a person spend days waiting for their money, with the labor required being hectic as well. The banks require extensive documentation and hence, the process becomes annoying. Also, this neglects the sense of urgency a person may have.

Curbing the conflicts of financing, a better and more efficient method comes to mind—P2P Lending, which not only helps get a loan but also becomes a mode of investment.

P2P Lending

What is P2P Lending?

Peer-to-Peer Lending is a process of debt financing which is

  • Faster,
  • Less frantic and,
  • Is reliable during times of urgency.

P2P lending is a method of financing without involving any official institution or beneficiary. This is quite unlike how the world has functioned so far – since most people head over to banks for money.

But India has historically been different. We’ve had relatives and moneylenders lending us money for generations in our culture. In fact, we’re also the sort of people who wouldn’t hesitate to even help strangers facing financial trouble. That’s where P2P lending fits in beautifully.

As the name suggests, P2P lending helps a borrower directly connect with a lender through online platforms. Before you jump on to say this is unsafe and unreliable – hear us out. These platforms require the borrower to sign up for all necessary documents and ID proofs. The lender and borrower come in direct contact via such platforms. Based on the borrower’s assessment the principle, the rate of interest and the tenure of the loan can be negotiated. A lender is basically an investor who wants to earn a profit with their money. This profit is through the interest rate that the lender pays.

Borrower’s credibility is ascertained through various scans. Their credit scores are published on the platform. TAne assessment of the documents provided, the income and any previous repayments of the borrower is also made available. It’s all transparent. The lenders can then filter the borrowers to whom they want to lend their money. It’s as democratic as it can get!

The borrowers may use your money for a medical emergency, business expansion or even small purchases. While you’ll be assisting individuals in their times of need, you’ll also be compensated handsomely for it.

How does P2P Lending work?

It’s a booming industry already, and there are multiple platforms providing P2P lending services. Borrowers can sign up and upload their documents in the order required by the service. A borrower needs to upload documents that show their income, IT returns, valid ID proofs, address proofs, etc.

A borrower can seek a loan from a willing lender once an application is filed on the portal. A lender meanwhile, can have registered on the platform in a similar fashion, in compliance with KYC norms.

Here’s the kicker if you haven’t noticed it already – multiple lenders lend to a single borrower. It’s never the full amount. This greatly reduces the lender’s risk and greatly improves the borrower’s chances of getting funded.

While one lender agrees to provide a partial amount of the credit, the borrower seeks other lenders for the fulfillment of the total credit required. Whether a borrower receives their loan largely depends on their credit history. A lender assesses the credit history on various details. These include the number of investors extending the loan, the types of credit extended, the borrower’s repayment history, etc.

P2P Lending
Investment Opportunities

The qualification of a borrower also depends on the borrower’s current and new debt compared to his before-tax income. 

  • Lenders can generate income through interest, which will most certainly exceed the amount that they can earn by savings accounts or any other form of investments.
  • They can take precautions such as checking the credit rating process of the platform, the borrower’s worthiness and also be looking for platforms that help in the loan recovery if the borrower defaults.

it is strongly advisable to distribute the amount invested over a number of borrowers, as even though this process is secured through verifications, it reduces the risk of losing the entire money if the borrower defaults. This isn’t unique to P2P Lending but is actually just sound financial advice. You’d diversify your portfolio across any investment, wouldn’t you?

The current phase depicts a decline in the economy and the decline of interest rates provided by banks, the stock market as well as the real estate prices, P2P lending becomes an increasingly attractive option for investments.

Wrapping Up

  • P2P Lending stands for peer-to-peer lending which reduces the need for a middleman and red-tapism in debt financing by creating a direct conversation between a lender and a borrower.
  • These are online platforms that help a person seeking loan as well as a person who looks for investment opportunities.
  • To build a borrower’s credit score, everything from his tax returns to payment history is appraised.
  • Lenders sort the borrowers on the basis of their credit score which helps them decide whether to lend to a particular person or not.
  • In the time of economic decline where interest rates, real estate, and stock market are going down, P2P lending becomes a viable option for investment.

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