In recent years, banks have reduced the volume of credit services to cope with the financial crisis. Moreover, the central bank of India has lowered interest rates on savings. As a result, entrepreneurs and individuals face problems when they have to take personal loans or any other loan. Banks are reluctant to lend money to young companies and new borrowers. That is why customers needed a new way to borrow funds. It led to the birth of peer-to-peer lending. Let’s know more about it with great attention. In simple words, peer 2 peer lending is an innovative financial instrument. In this process, one person gives microloans to another without using banks or micro credit organizations. A person must register on peer-to-peer lending platforms to act as a borrower or lender. Remember, the intermediary company regulates the process, helps you choose the best option, and ensures players in case of force majeure.
In addition, the exchange checks the reliability and solvency of borrowers. Individuals, groups of individuals, and investment organizations often act as credit lenders. P2p peer lending opens financial doors for small businesses and creates a scenario where everyone wins. It connects investors with entrepreneurs directly. Today, many platforms are ready to act as an intermediary between those who want to take out a loan and those prepared to risk this money.
Despite the external simplicity, p2p lending involves studying borrowers’ credit history and forming a trust rating to reduce investors’ risk. The relationship between the lender and the borrower is sealed in a contract paper. The agreement is legally binding for all parties involved in the contract. Interested parties can use it as evidence in the court proceedings. However, hardly anyone reaches the court. Peer-to-peer lending is beneficial for both lenders and borrowers. The lender’s profit percentage on p2p investments is higher than the percentage on bank deposits. After passing a less strict test of their reliability, borrowers can take small loans quickly.
Zopa first introduced P2P lending in 2005 in the UK. It is one of the most peer-to-peer lending institutions in the world. The most important question is who uses P2P lending and in what cases? Most of the transactions are private loans between an investor and an individual. In some cases, legal entities (companies and firms) get involved in this process. Peer-to-peer lending carries a higher risk for lenders compared to conventional bank loans. Due to the high risk in peer-to-peer lending, interest rates are relatively high. Depending on eligibility and repayment potential, you can borrow funds from Rs. 10,000 to Rs.10 lakhs for 3- 36 months.
The interest rate of peer-to-peer lending changes from one bank to another. Lenders often determine interest rates based on an auction. For example- a person plans to get a loan but is not ready to pay more than the specified amount. The investor forms the best offer and puts it on auction with the most acceptable terms. The intermediary receives income as a percentage of the total loan amount or fixes payments in the agreement. Depending on the terms of a particular contract, the percentage is charged to the borrower and investor.
Also Read : An All Inclusive Guide To The Line of Credit
Is Peer-To-Peer Lending Suitable For Everyone?
Always keep in mind that p2p lending is not suitable for everyone. Is this an ideal option when you look for a quick personal loan? Yes. Is this a convenient way to invest your additional money and make big profits? Yes. But, should you take this risk? Let’s have a look at the pros and cons of both sides.
Pros of peer-to-peer Lending
While a personal loan (offered by banks) can have an interest rate of 12 to 20%, a P2P loan can have as little as 6.5% with a good credit score. Another advantage is that the application process is less formal than a traditional loan. Fewer formalities, minimal documentation, soft credit checks are salient features of p2p lending practices. Even if your credit score is terrible, you can explain it to the lender and take a loan by fulfilling the basic terms and conditions. In addition, you can get loans for almost all reasons as long as there are lenders who are willing to invest.
P2P loans are unsecured, which means that collateral placement is not required. It is much safer than a take-out, second mortgage, home equity line of credit, or secured credit card. Lenders issue loans solely based on your creditworthiness. You can use peer-to-peer lending to consolidate many loans ( with higher interest rates). A single P2P loan helps save lots of money as interest fees over many years.
Cons of P2P loans:
In recent years, the interest rates on P2P loans have skyrocketed. As a result, you end up paying more interest than you would with a credit card. In addition, if you make late repayments, the lender will impose fines. And, if you default on the loan, foreclosure fees are highly likely. P2P loans also tend to favor shorter terms—the interest rate increases with the number of each request.
Usually, you get P2P loans for five years. Peer-to-peer lending with longer terms is quite rare. Borrowers must not daydream about guaranteed funding. Only 10% of all applicants get the requested funding. Privacy is another significant concern for many people. At the same time, reputable marketplaces will not disclose your most essential data to anyone. Nevertheless, it would help if you still were worried about details that come under lenders’ scrutiny who review your applications and ask for lots of more information related to your employment, income, personal identity, credit score, previous transactions, etc.
If you have to take loans regularly, stay away from P2P lending altogether. P2P loans will make a big hole in your budget if you can’t control your finances very well. Since borrowers and lenders meet over the global internet, it is easier for the former to elope with the money and never return it. P2P lending websites and exchanges check users for reliability. However, the degree of their control is not as great as in banks. Most often, individuals with an adverse credit history successfully register on P2P lending websites and get loans as well.
An experienced fraudster can comfortably deceive automated verification systems and rating agencies. Falsifications of documents, fake accounts, and bogus reports are rampant in P2P lending. Many fraudsters take several affordable loans and return as agreed with the lender. This allows them to get an excellent credit rating. They use it to get expensive loans on favorable terms and don’t repay the borrowed money at all. P2P exchanges use different methods to fight this unlawful practice.
Protection From Non-Repayment of The Loan
If the borrower stops repaying the EMIs, the P2P lending company tries to resolve the issue with him through negotiations within a month or two. If this fails, the firm transfers his loan to the debt collection agency to recover the unpaid money with all applicable fees. The company can also sue the borrower and get a foreclosure on his assets, such as collateral, bank deposits, wages. It can also sell the written-off debt.
What To Pay Attention To When Choosing A Peer-To-Peer Lending Service?
Before you start working with a particular P2P agency, you should research and analyze.
- Get more information about the company and check its legal status first,
- Find out the service education of the company and check customer’s review carefully,
- Study all documents available on the website. Reliable P2P firms display a license agreement or agreement between an investor and a lender. Read all points carefully and make sure you understand all terms and conditions of P2P lending,
- Each platform charges interest which may vary significantly. Choose a P2P loan with the most optimal condition and lowest possible interest charges.
- Phone number and addresses- a stable P2P lending company is always ready to answer all questions related to its services.
Helpful Instructions on How to Invest in Peer-to-Peer lending
- You need to create an account on a peer-to-peer lending website to get started. Explore different loan options as far as possible. Sophisticated P2P lending institutions typically evaluate risks and provide automated investment tools.
- Next, you need to select an investment and allocate funds. Typically, you can finance the entire loan or diversify your portfolio by financing a small portion of many different loans.
- Finally, you can log in to the peer-to-peer lending website to check your earnings and the progress of your investments. Then you can either reinvest any profit or withdraw it.
Helpful Tips On How To Get A Peer-To-Peer Loan
- Determine the type of peer-to-peer loan you want and choose a P2P lending site,
- Submit your application on the site and get ready for a soft credit check,
- If your application is approved, you will review the proposed loan terms and interest rate,
- If you are ok with the terms, you can send the loan listing to the platform and wait for investors to finance it. This usually happens after a hard credit check.
- Once your peer-to-peer loan is funded, your funds will be transferred to your bank account. You will need to follow an agreed repayment schedule and repay the borrowed money on time.
3 Main Types of Peer-To-Peer Loans
You can get a peer-to-peer loan to finance almost anything. Some critical peer to peer credit lending is-
Personal Peer-To-Peer Loans
This type of peer-to-peer loan includes medical bills, car purchases, debt consolidation, home repairs, vacations, and other significant assets. As a result, the volume of peer-to-peer loans is often much more comprehensive than that of traditional financial institutions.
Peer-To-Peer Education Loans
Many people use peer-to-peer loans to finance their studies. These loans are usually lump-sum payments that allow the borrower to pay for their training expenses in any way they want.
Peer-To-Peer Loans For Businesses
Small businesses often receive peer-to-peer loans to help start or grow businesses. These loans are suitable to launch new products, invest in marketing campaigns, or expand your business by hiring new employees. Remember, unlike banks, peer-to-peer lending applications allow companies to direct loan requests to several different investors at once, increasing the chances that their loan will be financed.
No Hidden Fees At All
As peer-to-peer lending occurs between two people rather than between an individual and an institution, generally, there are no hidden fees. Lenders make money by having no one as their intermediary, allowing them to earn more money from interest rather than charging more. In addition, with lower interest costs and no hidden fees, the borrower can repay the lender much faster than they can repay the bank loan.
So, it is safe to say that peer-to-peer lending amounts to social lending or social lending. It allows investors and entrepreneurs to create a mutually beneficial agreement without red tape. For entrepreneurs, peer-to-peer lending will enable them to access funds that they previously could not get for various reasons. Here, the rejection rate is several times lower than in banks because of the quantitative nature of these loans. This type of cooperation also allows you to build long-term relationships between entrepreneurs and investors.
Peer-to-peer lending is a great way to get much-needed money. It is also an excellent way to make money for aspiring entrepreneurs. Many peer-to-peer lending platforms are very active in India. People who participate in peer-to-peer lending enjoy talking to each other, sharing their experiences, discussing politics, and generally connecting.
Many people who use peer-to-peer lending don’t like banks very much. It allows them to meet people with similar ideas, helping people who can’t get credit otherwise. In addition, the more personal aspect of the peer-to-peer lending system means that the people involved have the opportunity to share their stories. After hearing their stories, they can encourage lenders to hand over money to those people. So, evaluate the pros and cons of P2P lending practices and take maximum advantage of them.