Peer-to-peer (P2P) lending, also known as direct lending or crowdfunding loans, has become a popular alternative to traditional bank loans. But what exactly is P2P lending and how does it work? In this comprehensive guide, we’ll explore the ins and outs of P2P lending and why it may be a viable option for borrowers and investors alike.

What is P2P Lending/Finance?

P2P lending is a form of lending that connects borrowers directly with investors, cutting out the middleman (i.e. banks). This allows borrowers to access loans at potentially lower interest rates, while investors can earn higher returns on their investments compared to traditional savings accounts or CDs.

How Does P2P Lending Work?

The P2P lending process typically involves the following steps:

1. Borrowers apply for a loan through a P2P lending platform, providing information about their credit history, income, and the purpose of the loan.
2. The P2P platform assesses the borrower’s creditworthiness and assigns them a risk rating.
3. Investors browse through the available loans and choose which ones to fund based on the risk rating and potential return.
4. Once the loan is fully funded, the borrower receives the funds and begins making monthly payments to the P2P platform.
5. The P2P platform distributes the payments to the investors, taking a small fee for facilitating the loan.

Why Choose P2P Lending?

There are several reasons why borrowers and investors may choose P2P lending over traditional lending and investment options.

For Borrowers

• Lower interest rates: P2P loans often have lower interest rates compared to traditional bank loans, making them a more affordable option for borrowers.
• Easier approval process: P2P platforms may have more lenient approval criteria compared to banks, making it easier for borrowers with less-than-perfect credit to access loans.
• Faster funding: P2P loans can be funded quickly, sometimes within a few days, compared to the lengthy process of getting a loan from a bank.

For Investors

• Higher returns: P2P loans can offer higher returns compared to traditional savings accounts or CDs.
• Diversification: By investing in multiple loans, investors can spread out their risk and potentially earn higher returns.
• Control over investments: Investors have the ability to choose which loans to fund, giving them more control over their investments.

Risks of P2P Lending

While P2P lending can offer attractive benefits, it’s important to understand the potential risks involved.

For Borrowers

• Higher interest rates: While P2P loans may have lower interest rates compared to traditional bank loans, they can still be higher than other forms of credit, such as credit cards.
• Limited loan options: P2P platforms may not offer the same variety of loan options as traditional banks, making it difficult for borrowers with specific needs to find a suitable loan.
• Default risk: As with any loan, there is a risk of default, which can negatively impact the borrower’s credit score and result in additional fees.

For Investors

• Default risk: As mentioned, there is a risk of default with P2P loans, which can result in a loss of investment.
• Lack of liquidity: P2P loans are not as liquid as other investments, meaning it may be difficult to sell or withdraw your investment if needed.
• Platform risk: P2P platforms are not immune to financial troubles, and if the platform goes bankrupt, investors may lose their investments.

How to Choose a P2P Lending Platform

When considering P2P lending, it’s important to choose a reputable platform that aligns with your goals and risk tolerance. Here are some factors to consider when choosing a P2P lending platform:

Reputation and track record

Do your research and choose a platform with a good reputation and a track record of successful loans. Look for reviews and ratings from other borrowers and investors.

Loan options

Different P2P platforms may specialize in different types of loans, such as personal loans, business loans, or real estate loans. Choose a platform that offers the type of loans you’re interested in.

Fees

P2P platforms typically charge fees for facilitating loans, so be sure to compare fees between platforms to find the most cost-effective option.

Risk assessment and ratings

Some platforms may have more rigorous risk assessment processes and assign risk ratings to loans, which can help investors make informed decisions about which loans to fund.

Secondary market

Some platforms may offer a secondary market where investors can sell their loans to other investors, providing more liquidity and flexibility.

Real-World Examples of P2P Lending

One of the largest P2P lending platforms, LendBox, has facilitated over Rs.2200 crores in loans since its inception in 2015. Borrowers can access personal loans for a variety of purposes, such as debt consolidation, home improvement, or medical expenses.

On the investor side, platforms like Prosper allow investors to fund loans for a variety of purposes, including debt consolidation, home improvement, and small business loans. Investors can choose from different risk ratings and earn returns ranging from 8.95% to 11.95%.

Conclusion

P2P lending offers an alternative to traditional bank loans and investment options, providing benefits for both borrowers and investors. However, it’s important to understand the risks involved and choose a reputable platform that aligns with your goals and risk tolerance. With the right approach, P2P lending can be a valuable addition to your financial strategy.


At Yield, we partner with the LendBox to facilitate the investments in P2P and one can start with as low as Rs.100 for 10% fixed interest. Check out the asset now.