Peer-to-Peer Lending: Basics
A good percentage of people in the world are involved in digitally enabled peer-to-peer exchange. This form of exchange has expanded dramatically in recent years, moving beyond simple retailing and free file exchange to personal, human-intensive services such as hosted accommodation, urban and city-to-city transportation, and peer-to-peer lending.
Peer-to-Peer Lending or P2P lending is fast gaining popularity. These lending platforms, also called as ‘social lending’ or ‘crowd lending’, are designed in a way that they are beneficial to both lenders and borrowers and are driven by innovative, cutting-edge digital technology.
Peer-to-Peer Lending is about individuals transacting between themselves for small ticket size personal loans, without the need to go through a financial intermediary such as a bank or any other financial institution. The P2P business model is starkly different from that of traditional banks. P2P platforms don’t lend their own funds – they act as a platform to match borrowers who are seeking a loan with lenders who are willing to lend to them through the P2P platforms.
How Peer to Peer Lending works
Here is the basic premise of P2P lending: People sign up on a P2P lending platform like PeerLend as a borrower or as a Lender. A borrower submits an application for a loan by providing his details, and KYC documents. The platform back office team performs a credit assessment of the profile and determines his credit worthiness.
A borrower’s profile shows up on the Lenders dashboard for about four weeks. Lenders review the borrowers’ profiles, can ask the borrower questions in order to decide whether or not to invest in them. While no personal information is displayed, information from the borrower’s registration data is provided to the lenders.
From a lender’s perspective, peer to peer lending allows them to directly lend to other people by having them register on the platform by providing their ID and address proof. They also provide the bank account details that they will use to transact on the platform.
Once the borrower accepts a loan offered by the lender, the platform back office team confirms the offer and prepares a loan agreement document. This is signed both by the lender and borrower. The borrower also submits non-dated cheques as security to the lender’s investment. The lender does an online transfer of the loan amount to the borrower and the borrower pays back to the lender online in equated monthly instalments.
Interest rates – Various P2P platforms in India are charging a one-time registration fee ranging between Rs.500/- to Rs.1,500/-, and a loan servicing fee ranging from 3.5% to 6% of the loan amount.
Why does one choose Peer-to-Peer Lending?
P2P lending provides a new uncorrelated asset class for lenders and helps borrowers get quick loans at better interest rates. Borrowers have found peer-to-peer lenders more receptive to their needs with quicker funding speed even though they are subject to similar credit checks like banks. For most borrowers, however, the main advantage of P2P loans is that they get lower APR than those available from credit cards, other traditional streams like gold loans or cash loans.
Many Lenders are drawn to peer-to-peer lending because they are investing in real people, not some faceless bank or mutual fund. Peer to peer lending also adds diversification to a Lender’s overall portfolio. They are investing in consumer credit, which is a different asset class from other investments.
The author is CEO of PeerLend