How does P2P lending make loans cheaper?

Typical loans are lent by financial institutions such as banks to individual borrowers. These loans are either secured, i.e. banks collect some collateral as security against risk of default or unsecured, i.e. there is no collateral. Examples of secured loans are home loans and vehicle loans. The asset purchased is the security to the lender against default. Unsecured loans are based on the credit history of the borrower. These are, typically, smaller amounts lent to meet sudden, immediate or personal expenses.

Lenders charge a lot of interest for personal loans. As may be expected, default rates are high for personal loans. Lenders have to charge high interest rates to ensure they generate adequate returns over and above the loans that are written off. Banks also have the pressure to lend money. They cannot keep money idle in their vaults. Hence they also spend a lot of money in identifying and qualifying borrowers.

Banks have to cover their costs of loan origination, defaults and then charge interest for the money lent.

P2P lending reduces the cost of loan origination and reduces the default rate due to the social nature of the lending/borrowing process.

What is P2P Lending?

P2P means peer to peer. A person lends to another person. An organization does not lend to a person. P2P lending is the oldest form of lending. People who knew each other lent money to each other.

Online P2P Lending:

With the advent of the internet and social networking tools such as Facebook, it has become easier for people to connect to each other. This has impacted the lending/borrowing process also. Social networking lets individuals connect with borrowers over the internet in a very cost efficient manner. Internet makes it possible to connect to a larger group of people – one is not limited by one’s circle of family and friends.

Online P2P Loans are Cheaper:

P2P loans are cheaper because the costs of identifying/qualifying a borrower are reduced by extensive use of internet. Default rates are lower because there is a personal connect between the borrower and lender. Lenders can also choose to lend a part of the loan requirement of the borrower, thus spreading their risk over a larger number of borrowers. is India’s first online P2P lending platform. i-lend combines traditional lending practices with social networking to create the platform where borrowers and lenders transact. Borrowers benefit from lower rates and lenders get higher returns with optimized risk.