Finance Business Peer to Peer Lending

Peer to Peer Lending Business: Pioneering the Fintech Industry

Lending or borrowing money will not be a daunting task anymore, thanks to the facility of Peer to Peer lending. Also known as P2P Lending, this phenomenon is also called with names such as crowdfunding, marketplace lending, alternative lending and social lending. Peer to Peer lending is a method of debt financing through which individuals can lend or borrow money without any intermediary. Any business that is planning to establish a P2P lending business must acquire a P2P Lending License by following certain steps of P2P Lending License Process.

P2P Lending has emerged to be one of the major industries in Fintech industry with the creation of billions of dollars of loans every year.P2P is the practice of lending money to individuals or businesses through the online platform with the optimal use of technology. The lender’s investment in the loan is not protected by any guarantee from the Government.

The investors, that are available on the platform to fund the loan, could be individuals, private companies or financial institutions and invest in many different loans to spread their risk.

What are P2P loans?

P2P loans are amounts that individuals and investors make — as opposed to loans that you obtain from your bank. People with extra money offer to lend that money to individuals and businesses through online services. A P2P service is a central marketplace that matches lenders and borrowers, making the process relatively easy for all individuals involved.

The Loan Process of P2P lending

The loan procedure in P2P lending has five steps which involved two major individuals -investors and borrowers. Let us go through each step and understand how should it works –

Formation of Investor Base

Before accepting loan applications, building an investor base is significant. On the basis of the country, revenue model and risk factor involving the investors that just started using the new platform, the creation of an investor base is done.

Filing an online form

The borrowers that are interested in applying for loans fill in an online form on the platform where they fill in their personal, professional and financial information so that their credit risk can be evaluated. The information is collected and all the data is stored in the portal in a database. It, then, goes through a screening process for proper verification, which is talked about, in detail, in the next step.

Creation of borrower’s risk profile

This step involves the screening process. The P2P platforms assess the applications they receive to determine and create the risk profile of the borrower. The risk profile of the borrowers plays a significant role, for both parties. These platforms utilize certain applications to evaluate the creditworthiness of borrowers. Even if a borrower has no previous credit history, the innovative risk assessment models such as social credit scoring help the platforms to analyze the trustworthiness of a borrower based on their social media behaviour, online purchasing trends, individual expenditure, etc.

Funding of the amount

Once the screening process is completed and the credit score is created, the loan amount and borrower information with their risk level is listed for the investors to view. The investors now have to access the different profiles of the borrowers on the basis of their risk appetite. Platforms advise investors to spread their investments across different loans if they want their risk to be minimal. The P2P platforms send the amount to the borrower’s account (after deducting commission charges) once the investor agrees to a particular loan application and decides to fund that borrower.

Repayment of the loan amount

After the investor decides to fund the loan amount to the borrower, the repayment is collected by him and transferred to the investor’s account. Then, a certain amount as the commission is deducted, if in case there are any. The platforms have the right to retrieve the loan, in case of any dereliction.

Benefits to Burrowers

• Low-Interest Rates – The major benefit of P2P lending for borrowers is the low-interest rates when compared to banks and credit cards. In some cases, where borrowers refinanced or consolidated existing debt through P2P lending platforms, they reported a reduction of as much as 35% on their interest rates.

• Fixed Rates – The rates of interest are fixed and do not fluctuate, even if the payments are late due to any reason, makes this a desirable option, especially when compared to a credit card facility, where the interest rates are massive.

• Simple and fast application – The whole P2P lending process is quick, less complicated and simple to understand. There is transparency, ease and options built into it. It offers customers a good digital experience while resolving an important problem, hence the rapid growth.

• Low fees as charges – P2P loans have lower fees as compared to other options available. Besides, there is no penalty the burrower prepays his loan amount, making it easier for many borrowers.

Benefits of P2P to Lenders/Investors

• Higher returns – P2P lending offers higher returns to investors as compared to the normal method of lending. Here, the risk factor plays an important role, the more the risk, the more the returns. It could also be on a moderate level. Most investors opt for a combination of high risk and low-risk investments.

• Opportunity for diversification – P2P Lending offers investors an opportunity to diversify their portfolio as investing in consumer credit is different as compared to other investments.

• Simple to understand – For individual investors, P2P lending is easier and simpler to understand than most other investments such as bonds or stocks.

• Opportunity to perform better– A lot of investors opt for this type of lending as it gives them an opportunity to provide help to small businesses, individuals who find it daunting to take loans from the traditional financial institutions.

Defining Peer to Peer Lending Software

Peer to Peer Lending Software is a method to carry out lending businesses through the digital mode. This method makes the process of loan application less complicated, creates simpler ways for the creation of a financial flow database which leads to a synchronized system.

It has emerged as a modern business model that is driving a connection between borrowers and lenders with an automated risk evaluation. P2P lending has disrupted the financial sector and emerged as a competitor to the traditional banking model, with an instant loan approval process and the possibility of extending credit even to the borrowers with lesser credit scores Such borrowers are not usually considered eligible to avail a bank loan.

How is it different from other softwares ?

P2P lending businesses source the loan amount from investors through the platform rather than investing from their own pockets. The major objective of the P2P lending business is to provide better facilities than traditional financial institutions. This benefits the lenders as they receive higher returns when compared to savings and the borrowers can borrow money at lower interest rates.

Some forms of peer-to-peer lending are student loans, commercial and payday loans as well as secured business loans. The lenders set interest rates.

Roles & Responsibilities of Peer to Peer Lending Software

Any online platform where an individual provides his information, which he would not share otherwise, must be kept completely confidential. But how safe are these platforms which are used by millions of people around the world?

The P2P lending software has an important role to play with regards to the service they provide. In order to maintain their quality standards, they must take certain measures.

Accuracy of information

The information provided by the borrowers must be verified, measured in the proper way. It is extremely important to ensure the accuracy of the information. Demanding for proofs, whenever a piece of information sounds suspicious is advisable. Taking all of the mentioned steps is necessary because borrower’s risk profile is created taking into consideration all these figures and facts and the lenders/investors take their decision on the basis of that.

Thus, the P2P software must contain a method where the accuracy of the information can be evaluated.

Protection of significant information

The borrowers provide the information by trusting the platform, thus all the information, which includes the facts and figures must be 100 per cent safe and protected.

Creation of an agreement

It is important to mention all the information in a document which must then be signed by both parties must sign it.

Establishment of better opportunities

Both the borrowers and lenders are looking for better opportunities that provide them with the maximum benefits. At the same, these businesses also ensure that they earn a good amount of profits. For this purpose, the lending software businesses, must invest their time and if required, money to brainstorm and create strategies that would attract both parties and result in more profits.

Different types of Lending Model

Then the lending model is categorized into three types, namely Consumer Lending, Small Business lending and Property Lending.

Consumer lending involves small personal loan such as loans for buying vehicles, for weddings, home renovations, repayment of credit card dues etc.

Small Lending Loans are provided by small businesses for purposes such as working capital, business expansion and asset finance.

Property loans are loans borrowed for personal mortgages, Buy-to-lets, Residential renovations and developing commercial loans.

Eligibility requirements for Peer to Peer Lending License

• A company legally registered in the country,
• The applicant must have access to technological, entrepreneurial as well as administrative resources,
• The applicant must have an appropriate capital structure,
• Directors must fulfil the required criteria,
• A proper plan for the efficient utilization of Information Technology System
• Business Plan

Process for acquiringPeer to Peer Lending License

• The company must be registered in India with the principal objective of financing,
• The requirement of minimum net owned funds of Rs 2 crores,
• Website/Mobile App Work Flow,
• Fill an online application on RBI’s website (COSMOS).
• Submit the hard copy of the application along with the required documents to RBI.

Wrapping up

The contribution of the P2P lending sector in the industry has been massive in the Fintech industry, which has experienced massive growth. The financial technology industry will continue to grow at an enormous level if such software continues to grow and develop.