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P2P Lending - Explained



What is P2P Lending?


Peer to peer lending (P2P) allows borrowers and lenders to connect directly through an online platform (P2P platform). Essentially, P2P platforms are a marketplace for borrowers and lenders wherein borrowers can choose an interest rate that is the most optimal for them, and similarly investors/lenders can choose an interest rate most optimal for them. 


In the past, if you needed money, you would go to a bank or credit union. P2P lending eliminates traditional financial institutions from the equation, hence the name. Instead, an internet platform connects someone who needs money with people and organisations who are prepared to lend money to them. Lenders


Advantages


Lenders, through P2P platforms can generate higher returns than a traditional savings account or debt mutual funds or fixed deposit or virtually any other fixed income product.  The borrower makes periodical payments, which include a principal amount and interest, similar to the traditional lending arrangement. The interest charged is the return earned by the investors in exchange for lending the borrower money.


Regulation


P2P lending is regulated by the Reserve Bank of India (RBI). Only a company registered with the RBI can offer P2P lending services on its website or app.


Who Are The Borrowers ?


Borrowers are generally credit-worthy individuals who wish to borrow from non-traditional sources because of the ease of convenience associated with P2P platforms.


Tips For Lenders - Before You Invest/Lend


  1. Compare P2P platforms and their terms and conditions.  Be aware of service fees, and commissions being charged by P2P Platforms. Create an account once you've found your favourite P2P platform.

  2. Examine the platform's investment offerings (borrower profiles), which are frequently categorized by credit score. Better credit ratings mean safer loans, but they also mean lesser potential return.

  3. Choose a borrower depending on the amount of the loan, the risk, and the potential return. You may have to wait for more investors to complete the loan's funding depending on the quantity of amount being raised by the borrower.

  4. Diversification: Invest small amounts of money in a larger number of borrowers. To minimise your exposure, the standard advise is to invest as little as INR 500 per borrower, subject to the platform's minimum allowable loan amount.

  5. Reinvestment: This refers to investing the money you receive from repayments in order to expand your pool of borrowers and earn a compounded return on your investments. 

  6.  Monitor your earnings. Payments and collection will be handled by the P2P platform.




How Is The Loan Disbursed? How Are The Installments Collected?


Loan disbursal and collection of repayment installments is handled by the P2P platforms in accordance with RBI regulations. Lenders' funds are deposited into a Lender Escrow, and the borrower's repayments are received into a Borrower Escrow.P2P platforms infrastructure then handles and maintains transactions from one escrow to the next.


P2P Account Opening/Onboarding


Before you start investing through P2P platforms, you must complete a short online KYC and have your Aadhaar, PAN, and bank account information on hand. Following KYC verification. The entire procedure generally takes only a few minutes. There is no need to submit a hardcopy of any document. 


What Are The Risk Involved?


Fixed-income investments do not come without risk. Fixed-income investments come in a variety of risk levels. The risk to your returns in P2P lending comes from the likelihood of borrowers whose loans you have invested in failing, that is, non-repayment. This form of risk applies to all lending investments, whether made by a bank or by individuals like you through a P2P platform.


Historical default rates, commonly known as NPA (Non-Performing Assets), for borrowers, is extremely low on reputed P2P platforms such as LenDenClub. It's important to understand that historical default rates simply reflect the quality of the loans sourced and do not promise future performance.


Conclusion


P2P platforms are offering one of the highest returns in the fixed income asset class. However, investors should understand the terms, conditions, and risks involved prior to making any investment. If investors invest their money carefully using P2P platforms they can generate superior returns.

 
 
 

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