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Whenever you need money for a personal or professional expense, turning to friends and family is an age-old solution for Indians. People usually borrow loans from their friends, family, colleagues, and other acquaintances to handle the finances during emergencies. The basis of most of these loans is mutual understanding and trust. In such cases, both parties agree to the lending and repayment terms. The borrowers repay the loan amount in a lump sum or easy instalments. The borrowers may repay the amount in a lump sum or instalments. Usually, such loans do not involve any collateral or guarantee for security.
Just like several aspects of our lives, technology has also transformed this traditional form of lending. The new-age form of these loans is known as peer-to-peer loans or P2P loans. If you plan to borrow money from others without approaching a financial institution or NBFC, read this article. You will learn everything about P2P lending and know how it works.
Typically, people approach banks and NBFCs when they need money to cover a planned or unplanned expense. However, these financial institutions often reject loan applications due to inadequate paperwork, low credit scores, insufficient income, etc. In such circumstances, P2P loans from friends or family come to the rescue. However, you must have a strong mutual understanding, and they must feel confident to get their money back in time. The limitation of peer-to-peer lending is that you can borrow money from only a few people who can trust you for their money. That is when a P2P loan comes in handy.
The lending mechanism works on the principle of connecting potential borrowers and lenders through a platform. The system provides loans to borrowers who need money for an expense while investors lend money to earn interest on their investments. So, it is a mutually winning situation for both parties. Since the transaction occurs directly between the two parties through an app or website, it eliminates the requirement of any financial institution to work as a middleman.
Therefore, the P2P loan mechanism extends financial inclusions worldwide as a funding source. These loans are highly accessible even if you have a poor credit score, low income, or insufficient documents. Whether you need a loan to finance your wedding, education, start-up, medical emergency, or debt consolidation, P2P loan platforms make funding easily accessible with an instant loan application procedure.
Peer-to-peer borrowing has always been a substantial market in India. A large number of Indians rely on their friends and family to finance their expenses even today. The global crowdfunding market is also evolving as a giant marketplace for P2P finance. The UK was the first country to introduce a P2P platform named Zopa in 2012. With its online expansion, people in need could access quick loans with no eligibility requirements and hefty documentation.
Since many Indians are still asset-light, P2P loans are popular among individuals and entrepreneurs today due to no collateral requirement. Currently, over thirty online platforms give fast Personal Loans, festival loans, Business Loans, etc., to people in need, and the number is continuously growing. The best derive their trust from easy loan application procedures, customer-friendly services, and minimum service charges. You can browse different loan plans and build a diverse and profitable portfolio based on your credit score.
In India, the introduction of peer-to-peer lending platforms like BharatPe and CRED has contributed to the boom. The segment delivers high returns compared to other asset classes. The investor base is witnessing consistent growth over the last few years, projecting promising numbers in the future.
Yes, peer-to-peer (P2P) lending is safe in India as long as you borrow through an RBI-certified platform. These lending platforms connect investors and borrowers after thoroughly vetting them for trust and creditworthiness. Several regulations are also in place to ensure the safety of the transactions. The most important ones include the following:
All these regulations work together to make P2P platforms safe for both lenders and borrowers.
P2P lending platforms match borrowers with relevant lenders through an online website or app. They enable borrowers to borrow loans at competitive interest rates. Some benefits of peer-to-peer lending are as follows:
While many borrowers do not qualify for NBFC loans due to their income, credit score, debt-to-income (DTI) ratio, and other reasons, P2P loans are accessible to all, irrespective of their financial profile. Although these platforms check the borrower's creditworthiness before enrolling them for borrowing, they make loans available to all. The best thing is that these platforms have no strict eligibility criteria or documentation requirements. The platform confirms all details at the time of registration, making the process much easier and faster at the time of borrowing.
Lenders can diversify their portfolios by lending loans to various borrowers instead of putting all their money into a single investment avenue. Besides bringing diversity into their portfolio, lenders can also spread their risk across multiple borrowers instead of lending a huge amount to a single borrower. Both lenders and borrowers have the freedom to choose their borrowers and lenders based on their risk appetite and credit profile.
P2P platforms work entirely online, which means the application process is swift, convenient, and handy to secure funds instantly. They connect borrowers with potential lenders waiting to lend loans, allowing borrowers to get the money they need in time. Since these are RBI-certified platforms, the charges are transparent, and procedures comply with the regulations.
Compared to other investment options, P2P loans have the potential for higher returns for the investors. Since the authorities thoroughly examine the borrowers' creditworthiness and repayment capacity, P2P loans have lower chances of default. These loans are also beneficial for borrowers, as they are available at much lower interest rates than traditional loans, helping them save money on the interest cost. Since there is high competition between lenders on the platform, borrowers have greater negotiating power and higher chances of getting the best loan deals.
P2P platforms have different processing fees and interest rates for lending loans. Some examples include the following:
Platform | Interest Rates | Processing Charges |
i2iFunding | 12% onwards | 3% to 8% for salaried or self-employed borrowers |
LenDenClub | 6.5% onwards | Rs 400 + GST for loans up to Rs 10,000, and 4% on loans greater loan amounts |
Faircent | 9.99% onwards | 2.5% to 8%, depending upon the loan amount and repayment tenure |
Lendbox | 12% onwards | 2% to 6%, depending upon the loan amount |
OMLP2P | 10.99% onwards | 1% to 10%, depending upon the loan amount and repayment tenure |
i-Lend | 15% onwards | 4% of the loan amount |
P2P lending is a modern mechanism that can bring an extensive amount of loan transactions into its fold. Borrowers with no credit history can benefit significantly from these platforms. To benefit the industry, regulators keep a close watch on the activities involved. If you plan to take out a small loan without the hassle of traditional borrowing from lending institutions, P2P loans can be great alternatives. The platforms cut out the intermediaries and allow you to borrow funds directly from retail investors.
Although a good credit score may help you get a loan with a lower interest rate, you will not be disqualified if you have poor or no credit history. Do due diligence and compare loan plans from various investors to ensure borrowing a loan that is worth the repayment terms. Need to know how to check CIBIL score free? Visit the credit bureau’s website for detailed instructions.
If you are a self-employed professional or an entrepreneur looking for small Business Loans, consider applying on the Hero FinCorp website for up to Rs 40 lakh at a competitive interest rate and flexible repayment tenures.
1. Can I lend money peer-to-peer?
Yes, if you want to invest your money into something that can earn significant interest without taking a high risk, you can register to an online P2P lending platform and start lending money peer-to-peer. Reputable platforms confirm the borrowers’ profiles and credibility to ensure safety and minimise the risk of default.
2. Is P2P legal in India?
Yes, P2P lending is legal in India and comes under the Reserve Bank of India (RBI) guidelines. The RBI has set regulations around how lending platforms should work. Therefore, any platform that wants to provide P2P loans must obtain an NBFC-P2P license from the central bank.
3. How do peer-to-peer loans work?
P2P loans connect lenders and borrowers directly through a website or app. Borrowers who do not qualify for traditional loans can borrow from these platforms to cover their needs. In return, investors earn an interest on the money they lend to needy borrowers. Both parties must register to the platform to borrow or lend money.
4. What are three examples of P2P lending platforms?
Some of the most popular P2P lending platforms are Loop, Lending Club, and Upstart. However, there are several other platforms you can trust and use. You can compare and use several different platforms for financial transactions.
5. What are the five types of peer groups?
P2P groups are of various types. The five most important are mortgage lending groups, pooled lending groups, credit unions, community banks, and Non-Governmental Organisations (NGOs). If you want a P2P loan, approach any of these groups to get the money you need.
The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.
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