What is Peer-to-Peer Lending?


If a shortage of funds and disapproval of loan from the bank is your concern then you have come to the right place.

It happens quite a few times that you apply for the loan but bank disapproves because of low credit score. It is believed that there is no solution for this but it is not true.

This is where Peer-to-Peer (P2P) lending comes into the picture.

Q. What is P2P lending?

A. P2P lending is an emerging platform for crowd-funding wherein individuals can invest their money with people who want to borrow. The concept behind this is savers getting higher interest by lending their money instead of saving and borrowers get comparatively lower interest rates.

The only snag is that one can lose money if the borrower defaults.

Q. How does it work?

A. It works on the amount you wish to invest and the time period which is up to 5 years. You can select the borrower if you are comfortable with the amount and timescale and invest accordingly.

Q. How to determine the rate of interest?

A. The rate of interest is determined by the profile of the borrower at which money can be borrowed. Since every platform has its own pricing and scoring pattern; therefore, one must compare the rates from different P2P platforms before borrowing.

Q. What is the eligibility criteria for a borrower?

A. Eligibility criteria for a borrower:

  •  Salary credited to bank account.
  •  Owning an e-mail account.
  •  A verified mobile number.

Q. What is the role of Credit Score in P2P Lending?

A. In case of P2P lending, anyone can be a lender or borrower irrespective of credit score. One must keep in mind that if a borrower has a credit score of 800 needs a loan of Rs. 8 Lakh must prefer bank instead of a P2P platform.

** Reserve Bank of India (RBI) has put a threshold on the amount that can be borrowed and lent.

Q. What are the charges involved?

A. The charges that are involved could be:

Lender Fees:

  • Account opening fee
  • Entry fee
  • Investing and reinvesting fee
  • Repayment collection fee – A percentage of monthly repayment collected from borrower
  • Exit/withdrawal Fee – A percentage of the amount withdrawn from escrow account

Borrower Fees:

  •  Registration fee
  •  Listing fee/account opening fee
  •  Borrower fee – A percentage depending on one’s rating
  •  Prepayment charges
  •  Loan processing charges

Q. What are the risks involved in P2P Lending?

A. The risk involved in case of lender: Since there is no face to face interaction involved, the lender must calculate the amount of risk involved. Though lender is suggested to create a variegated portfolio of loans.

The risk involved in case of the borrower: If the borrower is aiming to be a defaulter, in that case, he will be hampering his credit score. Moreover, there are arduous penalties in case of late payments or for defaulters and may include litigation process.

In case of defaulter: The borrowers are withstanding legally enforceable contract, they can be accused in court. The P2P platforms try to recover the defaulted amount, including steep penalties charged thereon by deploying their own human resources for no additional fees.

The Reserve Bank of India (RBI) issued directions for non-banking financial companies (NBFC) that operate P2P lending platforms.

As per the directions, no NBFC can start or carry on the business of a P2P lending platform without obtaining a Certificate of Registration.

In the above article though we have tried to accommodate as per best of our knowledge. Since Centrik is into project funding and has been serving customer’s satisfaction for last 4 years. In case you need any assistance you can either chat with us online or write to us at support@centrik.in.

Note – Please note that the above article is for education purpose only. This is based on our interpretation of laws which may differ person to person. Readers are expected to verify the facts and laws.

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