What is P2P lending and does it benefit both lenders and borrowers? All you need to know

Peer-to-peer lending, also known as P2P lending, is a form of crowdsourcing used to finance loans carrying an interest. It can be explained as the process of offering unsecured loans via an online marketplace that brings lenders and borrowers under the same umbrella. Any individual or organisation can request a loan in the role of the borrower. Given the rapid growth of technology, the introduction of “Digital India” has created a wide range of alternatives for market expansion. It is crucial to keep in mind that peer-to-peer services be legally operated only with RBI clearance.

P2P lending can be beneficial for both parties. Lenders may be able to earn much higher returns than bank savings or other investment options, while borrowers may be able to obtain loans with lower interest rates. Owing to these kinds of facilities, P2P platforms are considered a safe option in terms of any kind of potential fraud.

Interest Rate:

The borrower and lender may agree on the interest rate, or the platform may decide what it will be. A certain fee must be paid to the platform by both the lender and the borrower. The borrowers pay an origination fee, which may be a set rate or a percentage of the loan amount borrowed, in line with their risk classification. The rules on the platform further mandate that the platform may charge the lenders an administration fee as well as an additional fee if they choose to employ any other services such as legal counsel.

Required Documents:

To apply for any loan on these platforms, customers will need to provide their Aadhaar cards, PAN cards, and the other required KYC documents. In addition to their CIBIL scores, the authority will assess additional criteria to evaluate loan applicants. These parameters are examined using records like pay stubs, income tax returns, bank statements, balance sheets, and other financial data like previous performance, stability, and the purpose of borrowers.

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After the P2P platform finishes the necessary verification process, the loan conditions including size, interest rate, and length of the loan are determined. Then, the loan will be approved and handed to the borrower in a few business days.

The service enables users to compile loan repayment data and make a preliminary assessment of a borrower’s creditworthiness. The fees includes both the cost of these services as well as the general expenses of the company. As is the case with traditional finance intermediation, the platforms manage credit ratings and make money from arrangement fees instead of benefiting from the difference between lending and deposit rates.

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