Peer-to-peer lending platforms have been gaining much attention lately as a wonderful alternative to conventional financing options. This promising concept eliminates the need for banks and financial institutions while roping in individual lenders. P2P platforms connect the borrowers and lenders. While the borrower gets funds without needing to submit collateral or worrying about their poor credit score, the lender earns on the interest – a win-win situation for both!
Let us delve deeper and learn more about peer-to-peer lending, its benefits, and its limitations for your business.
What is Peer-to-Peer Lending?
Peer-to-peer loans allows individuals to seek funds without needing to apply to middlemen like a bank or financial institution. This lending platform permits businessmen to get money directly from lenders or investors. This flexible concept surpasses the limitations of traditional lending and helps borrowers get quick loans at competitive interest rates, etc.
How Peer-to-Peer Lending Works?
The borrowers can raise a loan request on one of the peer-to-peer lending platforms. Some best P2P lending platforms offer comprehensive services like establishing the borrower’s credibility, formulating the credit requirements, processing the funds, and collecting the dues. The lenders choose the borrowers according to their risk tolerance and return expectations.
RBI Guidelines
The Reserve Bank of India (RBI) has certain safety guidelines for peer-to-peer lending platforms. The guidelines include mandatory registration, borrowers’ credit check lenders’ scrutiny, transparency, etc. The fund amount should align with the lender’s net worth. Some RBI guidelines also make a net worth certificate from a CA a must-have.
How to Apply for a Peer-to-Peer Loan?
Just like you apply for a loan from a traditional bank, here are the steps to apply for a P2P loan:
- Write a loan application mentioning the type of loan and amount.
- Share all the basic personal and financial details.
- Check if you are pre-approved for the loan. For example, if you are looking forward to getting a personal loan and don’t get preapproved, consider adding a cosigner or looking for other options. If you get preapproved, check all the loan offers like amount, interest rate, repayment terms, EMI, etc.
- Upload documents like ID proof, income or employment details, bank statements, etc.
- The concerned people will verify the information.
- The loan amount is added to the bank account.
Peer-to-Peer Loan: The Advantages
Here are some of the advantages of P2P lending for your business:
1. Low Interest Rates
P2P lending platforms offer loans at lower interest rates than banks and other traditional lending institutions. They are able to provide cost-effective loans as the p2p lenders do not have to bear infrastructure costs. Their staffing requirements are also quite low.
2. High Accessibility
The businesses whose loans have been rejected by the traditional lenders can choose p2p lending platforms. Often, p2p lenders provide loans to individuals who do not meet the eligibility criteria set by the banks, like minimum credit score requirements.
3. Fast Approval
P2P lending platforms do not take long to approve the loans. Using high-tech tools and software, they evaluate risk quickly, perform a quick credit check, and automate loan approval. Due to the fast process, the borrowers can get loans quicker and more efficiently.
4. Diversification
This is the benefit for the lenders who get a chance to diversify their investment portfolios by offering multiple loans to customers with different risk levels. This allows them to lower the overall risk, enhance liquidity, and maximize returns. They receive attractive returns, often better than fixed deposit rates.
Peer-to-Peer Loan: The Disadvantages
Here are some of the limitations of peer-to-peer lending.
1. Risk of Fraud
P2P lending does not levy as strict regulations as traditional lending. Though there are RBI P2P guidelines, making this type of lending safer for borrowers and lenders, the possibility of fraud and scams still exists.
2. Borrowing Amount
The business peer to peer lending platforms hardly offer a loan of a significantly high amount. This limits the number of borrowers.
3. Loan Lock-In
Since most loans have a lock-in period of one to thirty-six months, the borrowers cannot withdraw whenever they want.
Wrapping Up
Peer-to-Peer Lending for Businesses is gaining popularity as more borrowers are now turning towards non-traditional borrowing methods. With more regulatory scrutiny, the industry will protect lender and borrower interest even more. You can also try entering into this promising avenue through borrowing and lending and experience numerous advantages.
FAQs
1. How many days does a peer-to-peer lending platform take to pass the loan?
Ans. The time depends on the lender and verification period. On average, you can expect to get the loan in five days of applying the loan.
2. Is it safe for borrowers and lenders to use peer-to-peer lending platforms?
Ans. Yes, it is as safe as getting a loan through a traditional lender. A borrower needs to furnish similar documents and go through the credit check. For lenders, it is always a bit risky to extend loans, and there is always a possibility of loans not getting repaid. The lenders can check the business credit score to evaluate the risk before passing the loans.
3. How do traditional and peer-to-peer lending differ?
Ans. Where p2p connects the investors or lenders and borrowers, the traditional lenders provide funds to the borrowers directly. P2P lenders offer personal loans mostly, while lenders offer a variety of loans like personal loans, car loans, home loans, etc. Lastly, P2P lending is considered more cost-effective and accessible compared to traditional lending.
4. What are the benefits of peer-to-peer lending?
Ans. The benefits include low interest rates, high accessibility, quick loan approval, diversification, etc.
5. What are the limitations of peer-to-peer lending?
Ans. The limitations include the risk of fraud, low borrowing amount, loan lock-in, etc.
6. What are the names of top RBI-approved p2p platforms in India?
Ans. The leading Reserve Bank of India (RBI) approved p2p lending platforms in India include LenDenClub, Faircent, Liqui Loans, i2iFunding, India P2P, etc.