Peer-to-Peer Lending

Peer-to-peer lending is a new lending practice where you can connect with potential lenders (individuals or businesses) through online services. Also known as social or crowd lending, this practice started to take shape in 2005.

Peer-to-peer lending is an alternate financing model that enables you to get unsecured personal loans from individual lenders. P2P lending platforms have a list of verified borrowers where investors can see your details before lending you the funds. 

 

If you are a lender, you can also diversify your investments by lending relatively smaller amounts to various borrowers. The interest rates of such P2P loans are higher compared to banks and NBFCs.

Although this option differs from traditional bank or NBFC loans, P2P lending platforms operate on a straightforward model. You can register on these lending platforms as a borrower or a lender (investor). 

 

By registering as an investor, you can invest your money on the platform and earn a fairly high interest rate on the invested capital. The P2P platform then lends the money collected from the registered investors to the registered borrowers. 

 

The platform efficiently connects borrowers with investors, creating a mutually beneficial arrangement. Here are the general steps involved in this system:

1. The borrower completes an online loan application on the peer-to-peer platform

2. The platform reviews the application and assesses the borrower’s risk and credit rating

3. Based on the rating, the platform assigns an interest rate

4. After approval, investors present offers that match the borrower’s rating and interest rate

5. The borrower evaluates and selects the best offer

6. The borrower makes regular interest payments and repays the principal at maturity

P2P lending brings in various features and benefits for borrowers and lenders alike. Here are its benefits: 

• Easy and Convenient Process

Online P2P lending platforms match verified borrowers with investors (lenders). The borrower and the lender need not personally know each other. The verification is taken care of by the lending platform.

• Flexible Loan Tenure

The minimum loan tenure is 3 months, while the maximum tenure is 36 months.

• Earning Source for Lenders

Lenders usually earn a relatively high rate of interest on peer-to-peer loans. Many use P2P lending as an investment strategy to earn higher rates of interest on their capital.

• Minimal Third-party Involvement

There is no involvement of any financial institution or an intermediary between the borrower and the lender, except the P2P lending platform.

• Attractive Interest Rates

For the investors, peer-to-peer lending can enable them to provide loans at relatively higher interest rates on P2P platforms. That is why it can be an attractive investment option.

• Ideal for Borrowers with a Poor Credit History

P2P lending platforms can benefit borrowers with poor credit history. They offer loans that  banks and NBFCs are likely to decline.

• No Security or Collateral Required

Usually, you can get unsecured loans, which do not require you to pledge any security or collateral.

• Helps Build Credit Score

It can be a viable option to build your CIBIL score by repaying your P2P personal loan within the chosen tenure.

While it offers advantages, this lending option has some potential drawbacks. These include:

• No Insurance or Government Protection

Unlike traditional banking systems, these loans do not come with any government-backed insurance or protection for lenders. So, if a borrower defaults on a P2P loan, you will have to bear the losses.

• Credit Risk

These loans carry credit risk as many borrowers usually have low credit scores. Therefore, there are higher chances that a borrower may default on the loan. 

• Legislation

In some regions, peer-to-peer lending is prohibited or subject to strict regulatory requirements. As a result, you may not have access to this type of borrowing or lending.

The P2P lending sector in India has witnessed a high growth rate in the last few years. Some of the popular platforms that provide this facility are:

• Lendbox

• Faircent

• LenDenClub

• i2iFunding

• OMLP2P

It is a high-risk lending option, as most borrowers are ineligible for loans from traditional banks and NBFCs. Therefore, the interest rates and the processing fees charged by these platforms are relatively higher. 

 

You can refer to the following table to get an idea of the fees and charges levied by these lending platforms:

Disclaimer: The rates mentioned above are subject to constant change. Check with the lender before applying. Additionally, the final interest rate applicable to you will depend on factors such as your repayment tenure, age, monthly income, and CIBIL score.

To protect the interests of lenders and borrowers, the Reserve Bank of India (RBI) regulates Peer-to-Peer lending platforms in India. RBI has made it mandatory for all existing P2P companies to apply for a Peer-to-Peer Lending license to continue operations.

 

As per RBI guidelines, a lender cannot invest more than ₹50 Lakhs across Peer-to-Peer platforms. The active participation of the RBI in the functioning of P2P lending platforms helps increase the credibility of such companies.

 

Its latest regulations also state that such platforms should not promise assured returns, offer liquidity options, or cross-sell any insurance product. This has been done to increase transparency and compliance from NBFC-P2P lending platforms. 

 

Here are a few crucial requirements to get a P2P lending licence in India:

• The company must have a minimum capital of ₹2 Crores

• The company has to have a proper hierarchy of CEOs, managers, workers, etc. 

• The business needs to also have a physical presence in the country

• These online platforms need to submit regular reports relating to their financial positions to the RBI

• The P2P platform can act as an intermediary between the lender and borrower by helping them communicate

• The platform has to put in the needed risk management plan

• It can only facilitate lending if both the lenders and borrowers have been matched as per the board-approved policy

P2P lending allows investors to earn interest on the invested money. Thus, interest income from P2P lending is taxable, just like interest income from other investment instruments.

 

Interest earned from peer-to-peer lending is classified as 'Income from Other Sources'. Thus, it is added to the lender's income and taxed according to the lender’s tax bracket. So, if you are in the 30% tax bracket, the interest earned will be taxed at 30%.

Here are some essential factors to consider if you are a P2P borrower:

• Set Realistic Expectations

Lenders will assess your debt-to-income ratio, credit history, and income streams. So, align your eligibility with your actual needs.

• Review Your Application

Thoroughly check your peer-to-peer lending application for accuracy to ensure all details are correct before submission.

• Protect Your Credit Score

Defaulting on a P2P loan can impact your credit history as P2P platforms report to credit bureaus. This will make obtaining future loans harder.