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Peer-to-Peer Lending

What is P2P Lending?

P2P lending, also known as peer-to-peer lending, is a modern online lending platform that connects borrowers with investors directly. This eliminates the need for traditional banks or non banking financial companies (NBFCs) as intermediaries and provides borrowers access to potentially lower interest rates while offering investors the opportunity to earn higher returns. P2P platforms act as facilitators, managing risk assessments, payments, and loan approvals.
The concept of P2P lending has gained popularity because it offers a more straightforward application process and faster approval times than traditional banks. Moreover, the transparency and flexibility of this model provide a win-win situation for both borrowers and investors alike. However, it is essential to note that P2P lending involves risks, such as default risk and fraud risk. Therefore, it’s crucial to conduct thorough research before investing or borrowing on these platforms.

How does Peer-to-peer lending work?

P2P lending is done through a platform that connects borrowers and lenders directly. Those who want to lend money, open an account with a P2P platform as a lender. And those who require a loan register themselves as a borrower.
 
These platforms then evaluate borrowers on various aspects. They don’t limit their evaluation to just credit scores. They perform their checks, including the borrower’s employment, income, credit history, etc. Not just that, using technology extensively, these platforms also capture borrowers’ habits through social media activities, app usage, etc.
 
Based on this assessment, the creditworthiness of borrowers is decided, and they are assigned to different risk buckets. It serves as the basis for how much interest rate a borrower needs to pay. The better the creditworthiness of a borrower, the lower the interest rate for him. And the poorer the creditworthiness, the higher the interest rate a borrower has to pay.
 
Lenders can check this assessment done by the platform for various borrowers and pick whom they want to lend their money as per the risk they want to take and the return they want to earn. Similarly, borrowers can also see the profile of lenders and reach out to them.
 
The P2P platforms do not keep a margin from the monthly installments or transactions between the lender and the borrower. Instead, they charge a fee from both for the services that they provide.

Is it Regulated?

To make sure that the platforms don’t do anything fishy or fraudulent, like holding on to money invested by the lenders or money paid back by borrowers, Reserve Bank of India (RBI) regulates these platforms.