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How does Peer-To-Peer (P2P) Lending Work?

15 July 2022

Are you looking for credit but cannot access the funds through the traditional modes of lending? Banks and other financial institutions get a detailed account of your credit score; sometimes, a poor score can come in your way of getting the funds you need. 

This is where the method of peer-to-peer lending comes into play. You can easily get funds from different lenders just by registering on a P2P platform. Let us understand this concept in detail.

What is peer-to-peer lending?

Peer-to-peer lending, also known as social lending, is a way to access funds without going through any bank or financial institution. The lenders and borrowers directly connect with each other through an online platform. 

This method of borrowing is especially beneficial for people who have a poor credit score and cannot get the required funds through the traditional modes. However, they have to pay the price in terms of higher interest rates. Lenders who wish to benefit from higher returns prefer this channel instead of keeping their funds in savings accounts or investing in other market instruments, even though the risk involved here is higher.

Peer-to-peer lending is becoming increasingly popular as more and more online platforms come up to facilitate the process. To understand this in more detail, let us see how peer-to-peer lending works. 

Also, Read - 10 Reasons Why you have a low CIBIL?CREDIT Score

How does peer-to-peer lending work?

Peer-to-peer lending is done through online platforms that serve as a common ground for the two parties – lenders and borrowers – to interact with each other. All users must register themselves on the platform, which requires filling in basic details about themselves. Every platform charges a certain fee for this. Make sure you compare all options before selecting the online P2P platform to get the best deal. 

If you are a borrower, you will have to put in additional details such as your credit history, income level, and employment status. Even though access to funds does not depend on your credit score, if you qualify as a highly creditworthy candidate, you can benefit from lower interest rates.

Once you are done uploading your information, put in the amount you require, and approve the interest rate that you may receive. On the listing of the loan, the lenders start evaluating whether to fund it or not. 

Once the loan is approved, the borrower receives the required amount. It may be funded by a single lender or multiple lenders who have a certain share in it. The borrower must make timely repayments through the P2P platform. The amount gets credited to the lender’s account. In case there is more than one lender, it is automatically divided as per their share in the loan. 

Earlier, P2P platforms were used only by those borrowers who faced difficulty requesting a loan from traditional sources. However, with an increased number of structured platforms facilitating the process of social funding, many creditworthy individuals have also opted for this source. This is because they may get lower interest rates as compared to what banks would charge. 

Let us see who all can become a lender on a P2P platform.

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Who can lend via a P2P platform?

All individuals who have a valid PAN card and bank account in India can become a lender on a P2P platform. This also includes HUFs, partnership firms, or any other artificial person that is incorporated or not.

Another thing to keep in mind is that the maximum time period for which a lender can extend a loan is 3 years. Moreover, the maximum amount any lender can keep at once on all P2P platforms is Rs. 50 lakh, and a borrower cannot take a loan exceeding Rs. 10 lakh at once on all P2P platforms. Additionally, no lender can extend more than Rs. 50,000 to the same borrower. 

Even though the risk associated with such platforms is high, they are perceived as safe to use. Let us see how they are regulated.

How are P2P platforms regulated?

P2P platforms come under the purview of the Reserve Bank of India. 

This form of lending is governed by the Master Directions for NBFC Peer to Peer Lending Platform, which was issued in 2017. The following are the key aspects of this:

  • Every P2P lender must hold a Certificate of Registration that is granted by RBI.
  • All NBFCs on the P2P platform must get themselves registered with the Department of Non-Banking Regulation in Mumbai.
  • A leverage ratio of a maximum of 2 must be maintained by all P2P lenders.
  • The P2P platform must have a net fund of at least Rs. 2 crore.

All P2P platforms are required to follow all RBI guidelines. Since this channel of lending is regulated by the RBI, it has become a secure way of lending and borrowing. 

Conclusion 

P2P lending is an excellent mode of crowdfunding and gives all kinds of borrowers access to credit. The lenders actively extend funds as they benefit from comparatively higher rates of interest, thereby earning more returns. All that is required is for you to get registered on a P2P platform and put forward your loan requirement. With a streamlined application process and proper platform regulation, P2P lending has gained immense popularity over the years. However, a word of caution. It is better to go to lenders that are regulated by the RBI. And keep in mind the interest and other charges before applying for such loans. 

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