P2P Loans: All You Need To Know Before Applying
Peer to Peer (P2P) personal loans or P2P lending is not a new phenomenon in personal finance. It is an approach to debt financing that allows people to lend and borrow money without going through the usual financial institutions as an intermediary. P2P lending foregoes the brick-and-mortar lending method and typically uses a website (also known as marketplace) to carry out this process.
In a nutshell, P2P lending enables direct loans between borrowers and lenders without using a middleman. A marketplace matches borrowers directly with lenders. These are usually personal loans or small business loans.
How marketplace lending works
Investors (lenders) on the lending platform lend their money for a pre-decided interest rate. The marketplace displays profiles of various borrowers, and lenders can browse through the profiles to see which borrower seems trustworthy and then decide to lend the capital. Often the investor may only decide to fund a portion of the full sum required by the borrower. In which case, the borrower may receive funds from more than one lender
This means that in P2P lending, a loan can have more than one sources and repayment must be made accordingly to each of the lenders. Since P2P lending works much like a personal, social loan, it is also known as social lending.
There are a couple of reasons why P2P financing works:
- For lenders, these loans generate an attractive interest rate that often exceeds the interest offered by traditional investment vehicles like savings accounts, fixed deposits or even investing in stock markets
- For borrowers, it gives quick access to financing that they may not get approval for, within the standard financial institutions.
- It also provides borrowers with a more favorable interest rate compared to banks and financial intermediaries.
- People with little credit history including a credit score (such as CIBIL) who would never be eligible for a loan via conventional means, can now access finance through P2P lending.
How to apply for a P2P loan
Verify your eligibility
Several financial websites provide access to online calculators. You can use these to check your loan eligibility before you proceed with P2P loans. These calculators assess your trustworthiness, based on several criteria including some credentials that you will be asked for. These calculators give you a fair idea of your personal loan eligibility using factors like age, income, job tenure etc. These calculators are also handy for figuring out a repayment schedule.
CIBIL score is an important factor for approval of personal loans. It is basically a three-digit numeric summary of an individual’s credit history. It is one of India’s top credit bureaus and they assign a three-digit score within a range of 300-900 based on how you service your existing credit payments.
It is important to check your CIBIL score and take the necessary steps to improve it if necessary before you apply for a personal loan.
While P2P lending platforms don’t solely rely on CIBIL score, it is often a part of the parameters they use to evaluate your merit.
Look before you leap
You can use loan aggregator tools and websites online that offer you a full list of all personal loans available. Before you settle on a particular marketplace lender that lures you in with tempting ads for personal loans, do compare and contrast the loan features. Compare aspects like tenure, interest rate, and other terms and conditions, on various platforms before you apply.
Also, verify the trustworthiness and transparency of the P2P lending platform and look for reviews online.
Applying for the loan
The application process is quite simple, once you have made your decision. Social lenders judge you on the basis of atypical parameters and don’t require a long-drawn-out process to apply. You will need to provide the usual documents for verification such as income proof, age proof, address proof, bank statements, IT returns etc. It is advisable to keep these in order before you start your application process so that you can expedite the approval and disbursal of the loan.
Once you have applied for your loan and supplied the necessary documents, the P2P lender will complete the verification process at its own end. The P2P lender will check your credit score, history and various other parameters before qualifying your profile. Many platforms assign a loan grade based on 400-800 credit evaluation parameters as part of their process.
Is it a safe platform?
One valid question that both borrowers and lenders have is regarding the safety or security of the platform. Do your research but also bear in mind that most of the mainstream operators pay attention to security and online data privacy of their users.
Some of the major P2P lenders ensure data privacy and comply with due diligence to keep your information secure and communicate via encrypted sessions. Please review the privacy policies and terms and conditions to find out what information is shared with the potential lender. Since interest rates are quite competitive, you will definitely pay less than a conventional bank loan but interest rates may vary based on several factors so studying this is necessary.
The Reserve Bank of India (RBI) has also recently announced that Peer-to-peer lending (P2P) platforms will be treated as non-banking financial companies (NBFCs) and will be regulated by RBI. In fact, RupeeCircle has recently been licensed by the RBI. Read about the announcement here. In summary, it is fair to say that P2P lending is an alternative to mainstream debt financing with mutual perks for both borrowers and lenders and ideal for personal or business loans. As with all financial arrangements, borrowers and lenders must spend time in research and check their suitability before they decide to lend or borrow on a P2P platform.