By Priyanka Singh
In layman’s terms, Peer-2-Peer (P2P) lending and borrowing is like a digital marketplace for loans. Hence usually it is known as ‘marketplace lending’ or often gets confused with crowd-funding. Instead of applying for a loan with a bank, NBFC, private finance company or any other loan institution, you can request a loan from regular people like you and me (therefore, the term Peer-2-Peer).
Most of these loans are unsecured for a large number of people who are underbanked or thinly banked. Most of the financial institutions stay away from giving loans to first-time loan applicants, small business owners or SME employees, women or people living in negative pin-code areas. Peer-2-Peer platforms offer access to these very groups of people to get credit on easy terms when required.
The actual logistics of Peer-to-Peer can be a little more complicated in India, but some platfoms like ours allow the borrower to download the app, fill the application form and apply for the loan. As a borrower, you have to fill a quick online registration form and pay the upfront registration fee which is refundable. Then proprietary credit assessment is done and a brief commentary of why you want a loan is shared with the lenders. The app requires the loan applicant to submit bank statement, upload basic KYC documents like PAN card, Aadhaar card etc. The proprietary algorithm assigns the loan interest rate and tenure to post the loan on the marketplace for lenders to assess and invest.
Lenders on the Peer-2-Peer marketplace are able to browse loan requests of multiple applicants. Each loan request offers relevant information about the borrower to the lender such as income, credit history, reasons for loan etc. If the lender likes the loan applicant’s profile then they can fund a certain portion of the loan. Partial funding enables lenders to diversify their investments and hedge potential risks. Once the transaction is completed, the loan applicant repays the loan in the form of equated monthly installments or popularly known as EMIs.
Is Peer-2-Peer Loan for You?
P2P lending and borrowing is not for everyone. Like any other financial investments, it has its risks and payoffs.
A major benefit of taking a Peer-2-Peer loan in India is that it is paperless, transparent and fast. The rate of interest is traditionally lower than NBFCs or other finance companies. The application process is faster and convenient with minimal documentation. Platforms like this perform a soft credit check and allow the borrowers to explain the reasons that led to a bad credit in the past. As long as lenders show confidence in the borrowers’ ability and intention to repay the loan, the borrower will get the loan. These loans are given without collateral based upon the creditworthiness of the borrower alone. However, the borrowers cannot expect a guaranteed funding. They can attract penalties if the EMI repayments are late and attract huge payments in case of a default.
Lenders on the Peer-2-Peer platform in the past few years have seen an average return between 12% and 18% annually. Also, it is a form of passive investment tool that offers great returns against the cash parked in savings accounts. By allowing lenders to invest in loans across a broad range of loan applicants for small amounts of fund, Peer-2-Peer investments offer an in-built mechanism to diversify.
(The author is Chief Marketing Officer at Mumbai-headquartered Peer-2-Peer lending platform IndiaMoneyMart)