What is Peer-to-Peer Lending, and how does it work?

Peer-to-Peer Lending is a process of lending money via online services to individuals or businesses. An online peer-to-peer platform provides services to match lenders and borrowers. It is also known as P2P Lending.

When borrowers lend money from other financial institutions like banks or larger financing bodies, they cannot earn higher returns due to the larger overhead and expensive services of the financing bodies.

On the contrary, Peer-to-Peer Lending services have lower overhead and are given at lower prices that attract both t lenders and borrowers. In this type of lending, borrowers can earn high returns, and lenders can borrow money at lower interest rates.

What are the various characteristics of P2P Lending?

The Reserve Bank of India (RBI) regulates P2P lending in India. Every functional P2P lending website in India is authorized by the central bank and must follow the guidelines laid down by the RBI.

Some of the characteristic features of P2P lending are:

  • Some people do not have access to traditional financial institutions to borrow loans. For such people, P2P lending helps to provide lenders with online.
  • P2P lending eliminates the need for banks or intermediary financial institutions to borrow and lend money. Hence, it’s a boon to those lower strata people in the country who cannot afford loans from these larger financial bodies.
  • P2P lending websites offer loans at lower interest rates to borrowers and allow lenders to enjoy a higher return on investment. How? Because these websites charge lower overhead costs and provide their services at cheaper rates.
  • The P2P lending process is completely online. The borrowers and lenders have to be registered on specific websites to lend and borrow money. They can get connected directly from the website.
  • These websites offer genuine borrowers and lenders as they do a proper assessment before any transactions are made.

How to avail Loan through P2P Lending?

The process of availing loan through a P2P website is possible if you follow the below steps,

  • You must research reliable P2P sites that are functional and provide services at your location.
  • Once you find a suitable P2P website, you can sign up for the website by heading to their registration process to become a member.
  • The P2P website you chose to sign up with will act as an intermediary and conduct all the formalities from your side.
  • After your registration with a suitable P2P website, it will automatically connect you with a prospective lender willing to provide you with the necessary funding.
  • Before receiving money from the lender, you will have to go through thorough checking multiple times.
  • The checking will be pertaining to your background, personal details, employment status, and credit history. The checking will be strict as the P2P website only endorses genuine prospects be it lenders or a borrower. As they provide loans only to credible borrowers as it is less risky.
  • If you want your background checks to happen smoothly, it is advisable only to provide genuine information on the P2P website. You must always remember that if you have any information on the site, you can be ruled out completely.
  • Once you receive your approval, the lender will provide you with risk categories under which you can borrow the required fund. So, you must decide and put your foot forward to lend money.
  • A lender has a provision for channeling their funds among multiple borrowers on a P2P website. The lenders have to decide the lending risk categories and channel their funds.
  • On a P2P website, the loans with greater risks will provide higher returns. As a lender on a P2P site, you can also auction your loan to lenders with limited funds.
  • A P2P site allows you to fix an interest rate or premier price for the loan and receive the bids. If the total loan is funded, the lenders might announce a higher fixed interest rate to get the right to fund undertakings.

What are the benefits of P2P lending?

There are numerous benefits of P2P lending, especially in India; they are:

  • It is a great option for the lower strata people who cannot afford loans from large financial institutions.
  • It is a very fast and hassle-free process compared to getting loans from banks. Once registered on a P2P website as a borrower or lender, you will be instantly connected to your prospective borrower or lender according to your preference.
  • P2P is an easy process as it requires minimal documentation, and they provide you with quick borrowing or lending services.
  • In P2P lending, the borrowers can avail of loans at lower interest rates compared to banks, whose interest rates on loans can burn your pockets.
  • Similarly, the lenders can also enjoy a higher return on their investment in P2P, which is impossible in other investments.
  • It is an online lending process and is completely regulated by RBI; hence it is 100% genuine.
  • P2P lending is a service dedicated to helping poor and middle-class people manage their finances and chase growth and success.

What are the disadvantages of P2P lending?

The P2P lending system has numerous benefits, especially for people belonging to the lower strata who cannot have access to banks for loans. But, it has its share of disadvantages; they are:

  • Since it is completely online, people can fake their backgrounds, and sometimes, even with stringent checks, it is impossible to detect fraudsters.
  • It is a very risky option as it’s purely online, and the transactions happen between strangers.
  • Sometimes, P2P websites can be fraudulent though RBI regulates it.
  • It is dreadful for poor people when they trust P2P sites, and anything turns out to be fake.
  • Since it’s a completely tech-savvy method, most of its target audience belongs to the uneducated sector who will find it difficult to access the process online. So, the match between the purpose and the audience is not right.

P2P lending has its share of advantages and disadvantages, but it is a boon to every person who has been guided to genuine prospects on these websites and found a solution to their financial problems.