Peer-to-peer lending (P2P lending), sometimes known as marketplace lending, is a type of lending in which individuals fund personal loans for customers. A P2P loan is funded by a person rather than a typical bank or financial organisation.
To apply for a peer-to-peer loan, you’ll normally fill out an application on an online financial platform, providing personal information, income, employment status, and credit score. If you are authorised, the platform will attempt to connect you with an investor who will decide whether or not to fund your loan.
The internet company arranges the loan, sends the funds to the borrower, and repays the investors when you repay your debt.
Peer-to-peer lending connects investors — both individuals and businesses — with those who need money. Traditional personal loans are provided by financial institutions such as banks, credit unions, and online lenders. When you borrow money from a person or company who invests in your loan, this is known as peer-to-peer lending.
Advantages and disadvantages of P2P lending as an investment?
When considering peer-to-peer lending as an investment, there are numerous factors to consider. These are some examples…
Advantages:
- Higher potential returns than other types of investment
- Loans can be secured, giving you some recourse if a borrower defaults.
- Some P2P systems contain reserve cash in case borrowers experience problems.
Disadvantages:
- Peer-to-peer lending is an investment, and your entire original investment is at risk.
- If you need your money back immediately, there may be fees.
- If the loan is paid off early, the returns may be smaller than projected.
Is peer-to-peer lending a safe investment?
In terms of security, peer-to-peer networks protect your personal and financial information in the same way that a typical bank or online lender would.
They aren’t, however, established banks or online lenders, which can make borrowing from them seem risky. However, investors bear the most risk; if borrowers fail to repay their loans and fall into default, investors are unlikely to receive their money back.
What’s the distinction between peer-to-peer lending and bank loans?
The primary distinction between peer-to-peer loans and bank loans is who finances them. A peer-to-peer loan is one that comes from an internet lender made up of an individual or a group of investors. A traditional bank loan is one that comes from a well-established financial institution, such as a credit union or bank.
Many banks have some of the lowest interest rates available, which is advantageous for consumers with excellent credit. If you currently have a traditional bank account, it may provide member privileges and incentives, such as higher autopay savings, to individuals who take out one of its personal loan products.
Those with a thin or less-than-perfect credit history, on the other hand, may want to explore elsewhere for a personal loan. Banks typically have tougher qualification requirements and slower funding schedules, making them more difficult to apply for and obtain loans from.
Bank loans and peer-to-peer loans have similar loan amounts and repayment durations, but if you need to borrow a smaller sum to tide you over, peer-to-peer lenders are more likely to offer loans with lower dollar amounts.
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Bhavin Patel, CEO and Co-founder of LenDenClub says, “LenDenClub- India’s largest P2P lending platform that provides an alternate investment opportunity to investors or lenders looking for high returns with credit-bureau-verified borrowers looking for short-term personal loans. With 2 million+ investors on board, LenDenClub has become a go-to platform to earn returns in the range of 10%-12% p.a.
Peer-to-peer lending has emerged as an alternative financing business model recognised by the RBI. During the pandemic, the segment has proven to become a mighty source to bridge the current credit gap. However, we need help to strengthen our contribution to the government’s vision of financial inclusion. It would be helpful to receive indirect benefits for the overall digital lending sector, such as incentives or tax benefits.
Additionally, P2P lending has evolved as a prominent investment asset class, ensuring the flow of investments from those with excess to those in need. While we work to meet the credit demands, we need assistance from the government to open the supply side by incentivising P2P lenders with tax exemptions up to a certain income. Further, it should allow bad debt write-offs, enabling defaults to be treated as capital losses during filing returns.
Not just for lenders but also on the borrowers’ side, personal loan repayment can become a part of the exemption under section 80C.
Furthermore, asset-based lending should be allowed to boost the confidence of lenders. This will also encourage innovation in secured lending, while the current innovation is focused on only unsecured lending.”
Conclusion
While peer-to-peer lenders provide personal loans in the same way that other financial institutions do, they are not the same. This sort of loan connects you with financial investors directly. Your loan is funded by an investor rather than a bank.
If you’re interested in P2P lending, the first step is to investigate and prequalify with the lenders you wish to work with. If you apply and are offered fair terms for your financial position, you can receive the funds within a few business days.
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