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Traditionally, if you wanted to borrow money, you would go to the bank and ask for a loan. The process would involve checking your credit rating and then evaluating your creditworthiness. Based on this, the bank would lend you money and offer you an interest rate on the principal repayment. Well, with the newest technologies, the market is changing, and India is no exception. Peer-to-peer lending is the new option on the horizon, which can be favorable to both lenders and borrowers.
Peer-to-peer lending also referred to as P2P lending, is a new way of lending and borrowing money by using an intermediary digital platform. In principle, anyone who wants to borrow or lend money can sign up to one of the P2P platforms and begin to participate in this part of the digital economy. This means that there is no direct intermediary negotiating interest rates or amounts, rather, individuals decide on their own to lend and borrow. The risk is assumed mainly by individual lending, but that also means that the borrower may incur higher interest rates. At the same time, rather than funding the entire amount of a loan that the borrower is looking for, lenders can choose to only fund a portion. In a way, P2P lending is similar to crowd-funding, but instead of purchases or donations, we are talking about loans.
Private companies set up P2P lending platforms for individuals. These are normally for-profit businesses that charge a fee from either borrowers, lenders or both for the transactions that they run. In return, they provide a number of services. First of all, they manage the platform itself. Here, borrowers and lenders register their profiles and the platform will conduct background checks. This includes ensuring the person’s identity, credit rating, and location among others. These will inform what interest rate bracket the borrower is placed in, helping lenders to make a decision on who to lend to. Additionally, the platform does provide a certain level of insurance for the amount lent, however, there is still a high risk of a borrower defaulting.
If you are a lender, there are some benefits of participating in a P2P lending structure. Essentially, it’s a great way to get a high return on your investment. Not so different from investing your money in any other type of interest-returning account with a bank, you will rather be investing to lend money to an individual or a business. The interest return tends to be relatively high and provide quick returns. However, as with anything, high returns also make high risks. There is a good chance that a person will default on their loan and even in countries where P2P lending is regulated, it will be challenging to recuperate the money in case this happens. That said, it does give you a lot of flexibility on lending the amount of money that you want and looking for the term and interest rate that you are comfortable with. Additionally, you can diversify your investment in a number of different borrowers.
Also, Read: Peer to Peer (P2P) Lending in India.
As a borrower, P2P lending can represent a great opportunity, particularly for those who have lower credit ratings or don’t yet have a credit history. The first step you’ll take is to register with the platform, which will analyze your current credit rating and the reasons why you need to borrow money. While this may sound similar to a bank, the process tends to be much more flexible. From here, you’ll start connecting with potential lenders and negotiating a borrowing scheme. One of the top benefits here is the fact that transactions can happen very quickly, in less than a day for smaller amounts of money. Additionally, if you are looking for a larger sum, have a very low credit rating, or want to lower your interest rate, you can sometimes secure your loan. This can be done by introducing collateral in the form of jewelry, antiques, fine arts, or something similar. Ideally, after you’ve borrowed the money, you will begin returning it on the schedule arranged with the lender. If not, you will incur a higher interest rate on delayed payments. Additionally, there may be a fee from the platform itself for borrowing. Keep in mind that P2P lending is available to both individuals and businesses.
Until recently, P2P lending was steadily growing in India but was not regulated by the government. A few months ago, the Reserve Bank of India has suggested the need to introduce regulation on P2P lending. While this will potentially introduce certain changes to the way that the platforms operate in India, it is typically a positive development. Basically, it means that P2P lending will become safer, potentially increasing the number of lenders and making it cheaper for borrowers to take out loans through these platforms. It also means that there are credible local options for borrowing outside of banks and other traditional lenders.
While for many, P2P lending may seem like a surprising option, it is not so different from the way we are used to borrowing and lending in communities. Often, we will borrow money from friends, family, and neighbors. P2P lending just expands that network to more lenders and borrowers and adds checks and balances for easier access to funds and more security for those lending. It’s important to remember that despite the potentially high returns, it can be a risky option for a lender, so you should never invest all of your money in P2P. At the same time, as a borrower, you should evaluate all of your realistic options before committing to P2P, as interest rates can be relatively high compared to a bank.
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