Many a times we need small loans of 2-3 lakhs for home renovation or starting a business or for repaying another debt but we avoid going to bank and borrow from relatives or friends instead. That?s because borrowing from relatives comes at Zero Interest rate and requires no collateral security or documentation. But how many times you fall under their obligation or what happens when they start denying helping you. This is where you can take help from peer-to-peer lending.
What is Peer-to-Peer Lending?
Peer-to-Peer Lending is an unsecured way of lending money through online platform at desired rate of interest, without involvement of banks or financial institutions. P2P lending sites bring borrowers and lenders together to transact directly with each other.
Peer-to-Peer lending works similar to banks where you borrow required money and pay interest but what makes it different from bank is that you neither you need to put any collateral security nor you need to go through the hectic process of documentation.
How Peer-to-Peer Lending Works?
Peer-to-Peer Lending is done online through various sites where both borrowers and lenders needs to register themselves and get verified by uploading KYC documents before transacting. Each party has the right to decide the interest rates they want to transact, i.e. in case of borrower ? what interest rate, he wants to borrow the funds, if available at that interest rates, they will provide you with the same if not other interest rate needs to be selected, same is the case with lenders.
To secure the investment of lenders, a certain percentage of a loan can be funded by one lender. For example if a loan of Rs.3 lakh is requested by borrower than there will be multiple lenders who fund this loan in a certain portion. Every lender and borrower can transact with multiple members. Once the lender and borrower agreed upon an offer i.e. amount of loan and interest rate, they execute a loan agreement.
Refer: Sample Loan Agreement
Globally, the agreed amount of money transfers from lender account to the escrow account of merchant (P2P lending sites) account. And the loan is disbursed into the borrower account once the minimum amount of loan is collected but only after post-dated cheques towards the EMI have been given by the borrower. But in India, the agreed loan amount is directly credited to the borrower?s account and the post-dated cheques are directly issues in the name of the investors.
In case the EMIs are delayed or not paid, the borrower is charged with penal interest. And if the borrower defaults in payment of EMI, the P2P lending sites proceed with loan recovery. P2P lenders need to rely on information gathered by P2P lending sites from credit bureaus like CIBIL. P2P lending sites charges very nominal amount of around 2% to 5% from borrowers (and in some cases 1% from lenders too) for the services they provide.
Reasons for Taking Loan from Peer-to-Peer Lending Portals
- Less compliance: As the process is very simple and all is done by sitting at home and person would have to go nowhere and just get it at home.
- Very fast: It has been said by the experts that the loan can be availed in 2 days as the process is very easy and user friendly.
- Fixed Interest rate: The interest rates for the borrowing funds would never go up and would remain the same for the whole period, which would be beneficial as there would be no effect to borrower for the inflation.
- Nominal Fee: The fees taken by P2P lending portals is very less as compared to the banks which charge high amount as processing fees.
- No Prepayment charges: There would be no prepayment charges in case the loan is prepaid earlier from the agreed tenure.
Benefits for Lenders in P2P Lending Portals
- Higher Interest Rates: P2P Lending platforms offer great interest rates as in comparison to the FDs made in the bank and so they are more preferable in terms of returns.
- Simple process: The process for investing in these platforms is very much simple and there are no haphazard or no time consuming process.
- Stable Returns: The revenues from these investments are pretty fixed and the return is very sure to be got as there are many backups available with the investor can get the same recovered.
- Liquidity:?The main and the most regarded advantage of these investment is that you can?get the money back as and when you need it. So it is most liquid investment.
- Divided risk: As the loan exposure limit is divided amongst various lenders, in case of default by any of the borrower, the risk would be less.
General Documents required for verification process
- Number of Passport Size Photos ? 2
- For identity Proof (Any one of the following)
- PAN card
- Aadhar Card
- Voter Id
- Address Proof (Any one of the following)
- Bank Statement
- Electricity Bill
- Voter Id
- Signature Verification from any bank
- DOB Proof (Any one of the following)
- PAN Card
- Income Proof
- Salary Slip for last 3 months (If Salaried)
- ITR Return with acknowledgement (If Business or Profession)
- Contact Proof
- Mobile bill
- Landline Bill
Some of the P2P Lending Portals Available in India:
- Faircent, one of the largest P2P Lending Platforms in India
Final Words of Wisdom
As a lender you might be tempted to earn high return but it always involves a high risk as there is no monetary protection is provided for principal or interests by any these portals in case of default. However, RBI has come up with draft norms to make the online lending business safer for the investors but currently; there are no rules to govern the P2P lending business. So if you are at Peer-to-peer lending platform, be a borrower and not a lender.