written by | December 23, 2022

Peer-to-Peer Lending: Meaning, Features, and Importance

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Table of Content


Peer-to-Peer lending, also known as P2P lending, is an alternative system of financial transactions that allows people to borrow money from other people using online lending platforms. Through these platforms, investors can connect with borrowers looking for unsecured personal loans and lend to them to increase their return on investment. There is no official financial institution as an intermediary in this transaction.

Did you know?

The P2P lending system already existed as an informal system before it was recognised and formalised. 

About P2P Platforms

P2P lending platforms link investors and borrowers directly. The website of the p2p platform determines the fees and conditions and permits the transactions. Individual investors who participate in Peer-to-Peer lending seek a higher rate of return on their cash savings as compared to a bank savings account or certificate of deposit. Before making a loan to a borrower, investors can check out a list of verified borrowers' information on the P2P lending sites.

Lenders can diversify their investments by making small loans to several different borrowers. P2P lending, also referred to as crowdsourcing or social financing, is steadily gaining favour with investors and borrowers in India. While rates for candidates with questionable credit histories may be significantly higher, prices for those with solid credit are frequently lower than equivalent bank rates.

Also Read: How to Get Business Loans in Chennai - Eligibility & Application

Peer-to-Peer Lending Features

P2P lending platforms allow those who wish to invest their money to lend money to people who don't have access to traditional banking systems. It provides credit to people who cannot obtain it through financial institutions by doing away with the necessity for a banking system or financial institution in borrowing and lending.

The fundamental tenet of this system is to provide advantages to investors and debtors. While it makes it possible for people to borrow money at low-interest rates, it also makes it possible for lenders to receive a respectable return on their money. 

The entire procedure is carried out using online platforms, where lenders and borrowers register and connect directly. The members are only permitted to participate in the transactions after conducting an appropriate assessment

The Reserve Bank of India regulates all venues for Peer-to-Peer lending. Both secured and unsecured loans are available through P2P lending. However, unsecured personal loans make up the majority of loans in P2P lending. 

Fast loans are uncommon in this sector and are typically secured by expensive collateral. Peer-to-Peer lending is regarded as an alternate form of funding because of a few distinctive features. 

Working of Peer-to-Peer Lending System

Lending between individuals is a relatively simple process, and an online platform designed for this purpose is used for all transactions. The general P2P lending procedure is outlined in the following steps:

  1.  A potential borrower fills out an online application on the Peer-to-Peer lending platform if they are interested in borrowing money.
  2. The platform evaluates the application and establishes the applicant's risk and credit standing. 
  3. A reasonable interest rate is then applied to the applicant.
  4. When the application is approved, the applicant can choose from the available options given by investors based on credit score and interest rates. The candidate may consider each proposed alternative before selecting one.
  5. In addition to repaying the principal amount when the loan matures, the applicant is responsible for making periodic interest payments

Both investors and borrowers must pay a fee to the company running the internet platform in exchange for its services.

Also Read: How to Get Business Loans for OPC Company? Check Eligibility & Application

Benefits of P2P Lending

P2P borrowers can benefit from significant cost savings compared to the rates provided by banks or other financial institutions. P2P lenders make the loan application process quick and easy. You only need to register on the website to immediately connect with the lenders and borrowers who are already using the site. 

These websites are exceptionally tech-savvy and provide services in a flash with little to no documentation. It streamlines the lengthy documentation process used by conventional banks and makes borrowing simple.

These Peer-to-Peer financial forums are committed to assisting others and promoting social progress. Information may be easily exchanged on these sites because they are centred on community service, and most users are pleased with how well they function.

The Peer-to-Peer lending mechanism is more focused and practical when compared to the formalities required by banks and other formal lending organisations for loan applications. 

Things to Verify for P2P Loan

  1. P2P loans are provided through online marketplaces (online platform that matches lenders with borrowers for unsecured loans). Before choosing, look at the website's and the lenders' reviews and ratings.
  2. Verify that the website is SSL certified to safeguard the security of your information because you will be sharing sensitive personal and professional information there. 
  3. Take your time when deciding to borrow money from P2P websites. Visit a few websites, spend some time familiarising yourself with how they operate on each, and then select the one you believe will offer the most advantages.
  4. Never be afraid to negotiate with the lender for the best possible interest rate when taking a loan. Also, provide the lender proof of your trustworthiness as a borrower and request a loan with low-interest rates. 
  5. Focus on the required monthly EMI payments. Check the loan tenure, processing fee (if applicable), and total additional payments due in addition to the principal amount and the EMIs.
  6. Ensure to carefully review the lender's loan-related terms and conditions before agreeing to a contract with them. Before accepting the terms, carefully read the paper to ensure no additional fees.

Also Read: Types of Online Business Loan Scams & How to Be Safe Online

Drawbacks of P2P Lending

Peer-to-Peer loans are very susceptible to credit risk. Many borrowers who seek P2P loans have bad credit, which prevents them from getting a traditional loan from a bank. A lender should therefore be aware of the likelihood that their counterparty will default.

No government or insurance protection: The government does not offer lenders insurance or any other kind of protection if a borrower defaults.

Legislation: Some regions forbid Peer-to-Peer lending or demand that businesses offering these services adhere to investment regulations. Consequently, specific lenders or borrowers may not be able to use Peer-to-Peer lending. 

Conclusion

Like traditional banks, those who want to lend money through a P2P platform must consider the chance that their loan recipients will default. Investors who are expecting higher returns on their investments usually participate in such lending transactions. According to studies on P2P lending sites, default rates can sometimes exceed 10%, making them significantly more frequent than those seen by traditional financial institutions. Any buyer or investor considering a P2P loan service should also consider the transaction costs. Since every website has a distinct revenue model, the lender or the borrower may pay fees and commissions. The websites also may impose loan costs, late fees, and bounced-payment fees, similar to banks. However, if executed in good faith, it is a win-win proposition for lenders and borrowers.

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FAQs

Q: What is the advantage of P2P lending over banks?

Ans:

Through P2P Lending, it is easier for a person with a low credit score to get a loan. Also, since the borrowers can directly negotiate with the lenders, it is sometimes possible to bargain for lesser interest rates. Unlike banks, the system does not require too much documentation, and it is much easier to get and process a loan through this channel.

Q: What is the standing of P2P lending in India?

Ans:

P2P Lending will see a massive surge in India in the coming years. India already has over 30 P2P Lending platforms, and the amount of lending will likely rise from 25 million to approximately 4 billion in the coming years.

Q: What is the eligibility Criteria for getting a Peer-to-Peer Loan?

Ans:

Although P2P portals are accessible to everyone in need of cash, they tend to draw low-income individuals or those with low credit scores with no other way to obtain loans. But ultimately, the lender—a person or an organisation—determines whether to lend.

Q: How to invest in Peer-to-Peer lending?

Ans:

Create an account on a P2P lending website, then start lending money to borrowers and investing in Peer-to-Peer lending. These websites often allow the lender to select the borrower's profile, allowing them to choose between higher risk/higher returns and lower risk/lower returns. Alternative investment options include purchasing company stock, as many P2P lending platforms are publicly traded businesses.

Q: Is Peer-to-Peer (P2P) lending secure?

Ans:

P2P lending is riskier than a savings account or certificate of deposit, but the interest rates are frequently significantly greater. This is because most of the risk, which banks or other financial institutions typically handle, is taken on by the investors in Peer-to-Peer lending platforms.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.