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What is Peer to Peer Lending?



Getting a loan from a bank is a difficult task. Banks have so many reasons, not to give you that loan. Banks say, the Company you work for, is not on our pre-approved list of Companies. Your documentation is not sufficient. Many times you just don’t know, why the bank has rejected your loan application. But there is a problem. You need money which means you need the loan. To solve this problem, an innovative online platform called peer to peer (P2P) lending, has made its way to India.

What is Peer to Peer Lending ?

A new form of lending has become highly popular among lenders and borrowers in India. This is Peer to Peer (P2P), lending. Peer to Peer lending is an online platform, where lenders are connected to borrowers.

Why Peer to Peer Lending?

You need money in a hurry and no bank is sanctioning you a loan. What can you do in such a situation? You borrow from relatives and friends. Informal lending in India is big business and you can avail loans from businessmen and family members, in the time of need. Indians are used to informal lenders and Peer to Peer Lending may be well accepted.You need a personal loan of INR 30,000.The bank has not sanctioned your personal loan. Banks do not sanction a personal loan below a certain limit. For most of the banks, INR 50,000 is the minimum quantum of loan you must avail, to have your personal loan sanctioned.Banks sanction you a loan only if the Company you work for, is on their pre-approved list. Peer to peer lending helps you get a loan when you need it the most.

How does Peer to Peer Lending work?

The online Peer to Peer lending platform, serves as a meeting place between borrowers and lenders. The online platform, verifies the credentials of the borrower. The borrower is thoroughly checked, to determine his risk profile. This is very necessary to determine the risk that he will default on the loan. The borrowers generally are persons, looking to avail a loan, at lower interest rates than banks. Borrowers could be people who can afford to pay back loans, but documentation or reasons like the Company they work for, does not fit the banks eligibility criteria, mean they do not get a loan from banks. Borrowers who have bad credit history and have been refused loans by banks and NBFC’s, also get rejected by Peer to Peer lenders.

Borrowers are assigned a rating based on their credit profile and risk assessment. The borrower’s salary and Company he works for, plays a major role in the credit rating. A low risk borrower is able to avail a loan at a lower rate of interest, compared to a borrower with a higher risk. The tenure of the loan could be 6-36 months. The online platform provides lenders with verified borrowers. The lender and not the P2P platform, bears the risk of a default. The lender can lend to borrowers on the platform, who do not have a high rating and can charge them higher interest. If the borrower defaults, it is the lenders loss. Lenders can also choose to lend to borrowers who have a good credit rating, but get a lower rate of interest from them. The lender can also diversify his lending portfolio, by lending to both kinds of borrowers, high risk and low risk. A lender can easily get more interest, lending on the P2P Platform, when compared to investing in a bank fixed deposit.

How does the P2P Platform gain?

  • The online platform (P2P), charges an upfront fee from both borrowers and lenders. Verification of borrowers is handed over to a third party. It also has a recovery process for borrowers, who default on loans.
  • The P2P Platform carefully checks the credit risk of all borrowers on their site. If a borrower defaults on his loan, the sites reputation is at stake. Lenders would hesitate to lend to borrowers on this site. Their business would soon shut down.

Does P2P Lending have a chance to succeed in India?

P2P Lending has risk, but so do all financial investments. If lenders on the P2P Platform give loans to borrowers of low credit risk, they could still make a higher interest earning than bank FD’s.The P2P platform also educates lenders on the best lending practices prevalent in the industry.The P2P platform does not guarantee borrowers that they will get a loan. It only helps them to get loans, at a lower interest rate. The future of P2P lending is bright in India. Whether it will succeed or not, only time can tell.

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