What is Peer 2 Peer Lending (P2P) and How does it work?
Peer to peer lending, also called P2P Pending is the lending of money to a large number of people through the internet / online. The P2P lending concept is gaining ground these days in India. It is like you are acting as a mediator between two friends, one is interested in lending and the other in borrowing. In the same way, peer to peer lending is done on a large scale. What is Peer to Peer / P2P lending? How you can get loans on at lowest interest rates through Peer 2 Peer Lending? How an investor in P2P Lending can get highest returns? This post is based on request from Mr.Ramakrishna on “Suggest a topic” to write about P2P Lending and whether it can provide better returns on investment.
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What is Peer 2 Peer Lending / P2P Lending?
Peer 2 Peer lending is lending of money between people on the internet or online. There is a lender who has idle money to lend. There is a borrower who needs money. The mediator is Peer 2 Peer lending company. These Peer 2 Peer Lending companies help thousands of borrowers and lenders to connect to each other. These companies protect the relationship between the two parties.
Their role is to see that
1) The borrower has enough credit ability for a loan.
2) They help the lender to lend his money.
3) They help the borrower to borrow the money from him.
How Peer 2 Peer Lending different from other loans?
The major difference is the difference in the costs. Like MP3 are a much cheaper way to provide music to the people than CDs, in the same way, peer to peer lending is also a much cheaper way to provide loans.
The loans obtained from banks or other financial institutions are accompanied with a very high interest rate as the banks have to charge the costs for the equipments, computers they run, thousands of employees working for them, the place and the set-up etc. These overheads incur extra costs and the borrowers of the loan have to bear them up.
As Peer 2 Peer companies run on so cheap costs, they pass on the benefit.
1) To the Borrower by providing him the loans at lowest rates in the history.
2) To the Lenders by giving them great returns on their investments.
Who can opt for peer 2 peer loan?
At times, people are carrying debt on their credit cards and all of a sudden, some medical emergency arrives and they need to arrange the money at a very short notice. Such people can opt for peer to peer loans. In other words, it is the best solution to the individuals who sort for small sums of money and not for a very long period.
What are the benefits of Peer 2 Peer Lending Loans?
The following are the benefits of obtaining a loan through P2P.
1) These loans are offered at very low interest rates, can say, the lowest in the country. Most borrowers can get it at a rate of 5% lower than the credit card rates.
2) The interest rates are fixed for these loans, unlike the credit cards or a bank loan. The companies will never hike the rate even if you are a defaulter of repayment.
3) Obtaining a peer to peer loan is quite easy and simple. The loan can be applied inline only by fulfilling minimum formalities and the money would move to your account electronically.
4) If the repayment of the loan is made late for any reason, peer to peer loans have much lower penalty than other options. Moreover, there is no penalty for prepayment of the loan.
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What are the benefits of investing in Peer 2 Peer Loans?
Investing in P2P loans is a bit complicated process, but the benefits are great. Here are the few benefits:
1) High returns – The major driving force of investing money is to earn returns and this type of lending ensures a great return to the investors. There are different rates of return on various levels of risks. Here, every borrower is graded according to the risks attached in lending him the money. Higher the risk, higher the return. The most stabilized return is 5-6%.
2) Stability – The peer to peer lending is much more stable than investing in another place. It is more stable than your investments in the stock market. This is because peer to peer loans are part of asset class called ‘consumer credit’. It is for the first time in the history where an average individual can invest in the trustworthy asset class of consumer credit.
3) Simple investment – Individuals do need loans for various purposes and you have the funds to be invested which is the basic simple concept of peer to peer lending. This concept of investment and its return is much easier to understand than most other investments.
4) Automated investment – As the borrowers repay the loans, you always have the cash flow coming and the websites have even the option of reinvesting the cash into new loans of your choosing. As a result, you can obtain a continuous cycle of investment while focusing on your regular work.
How do P2P Lending Companies work?
Step-1 – Loan seeker registers at P2P Company
Step-2 – P2P Company does KYC as per RBI guidelines
Step-3 – P2P Company verifies internally
Step-4 – It starts the bidding and reaches out to investors
Step-5 – Loan disbursement happens to a loan seeker
Which are the Peer 2 Peer Lending Companies in India?
If we talk in Indian context, there are several players who started Peer 2 Peer Lending loans. Here are some of the top P2P Lending companies in India.
‘Lendbox’ is one of the India’s leading market place in P2P Lending that act as a mediator between creditworthy borrowers and smart investors.
What it offers to investors?
By investing through this mode, one can earn interest returns as high as up to 36%. The investment can be as low as Rs.10,000 and invested in multiple verified and cross checked borrowers. Lendbox follows an out of the box approach to judge the credibility of the borrowers through a perfect blend of data analysis by highly qualified professionals.
What it offers to Loan seekers?
The interest rate for borrowers is as low as 12%. One can avail loans ranging from Rs. 25,000 to Rs. 500,000 without any hidden charges. The process of borrowing is quite hassling free and two parties to the loan can interact directly.
Another renowned website for peer to peer lending is www.faircent.com. It is another virtual platform where borrowers and lenders can interact directly. The terms and conditions, interest rates, tenure of loans etc. can be negotiated. The website charges a simple listing fee and does not earn out of the interest received by the lenders. Hence, the loans can be obtained at every reasonable rates of interest. The interest rates are ranging between 12% to 30% per annum depending upon the creditworthiness of the borrower.
Another leading player in P2P Loans is i2I funding. The features are similar to what other P2P Lending companies are doing like registration, borrower puts request for loan, verification of borrower creditworthiness, an investor invests in loan, funds transferred to borrower, etc., Here too, the website indicates that interest rates ranging between 12% to 30% depending on borrowers credit worthiness.
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Conclusion : Peer to peer lending is a dynamic and innovative concept which is gaining ground slowly in India. As a lender, an individual can invest in it, but he should be greedy regarding the interest rates and should invest in lower risks in order to avoid the chances of bad debts. It is also a very good option if we require immediate cash within a short notice of time.
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Peer 2 Peer Lending (P2P)
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Good one. Would highly appreciate if you can put an elaborate article on the procedural aspects, risk aspects, guarantees, etc. from the perspective of both borrower & lender/investor. Also throw some lights on the regulatory framework under which this operates.
I am a registered lender in one of the P2P company mentioned here. Let me answer a few question asked in comments and throw some light.
1. Currently P2P sector is not regulated in India. However RBI is expected to come with some regulatory framework soon.
2. The interest the lender earns is taxable as per his tax slab. Lender has to show the income and pay tax.
3. Guarantee of Repayment: A legal agreement is done between borrower and lender. If a borrower defaults then the P2P company tries to recover it as per their respective policies. However, if everything else fails then lender has the option to sue him legally. For practical purposes this is a risk that the lender takes, after seeing the profile of the borrower.
4. Reinvesting the EMI in another loan- The portal I am registered with does not have this facility. Borrower give post dated check to the p2p company.The portal deposit the check every month for credit in my account.
4. Now comes the return: The return may look high but as per my calculation it is not. In the portal I am registered with, 16-20% interest rate is very common for the relatively safer borrowers. For Risky borrowers the interest rate can be as high as 30%. ——-
Now lets assume You lend 100,000 to someone at 18% rate with a tenure of 1 Year.
The EMI you get is- 9168
So in 12 months you get-9168*12=110,16
That means an effective return of approx 10%.
If you are in 30% tax slab, you have to pay 3000 in tax. Return after tax is about 107,000. So,after tax return is measly 7%.
Considering the risk and taxation involved does it look too good now?
I invested in one borrower. I got clean repayment. But after I calculated the actual return and the risk I am taking for so low return, I stopped any further investment.
One observation I have about Lendbox.in is the customer support is horribly bad. The numbers mentioned on their website are never reachable & they never reply back to your mail causing a lot of trust issues. Faircent have a dedicated portfolio manager assigned to you so all the doubts gets cleared at any instant in just one phone call.
Thanks for your article. Pls explain what is the guarantes. For my money invested. Incase borrower not paid back