Peer-to-peer lending: Genius or folly

Peer-to-peer lending is the latest innovation in finance, promising investors high returns. But is it worth the risk?

Increased risk brings the possibility of increased rewards. Many modern investment vehicles follow this approach to maximise investors’ returns. Cryptocurrencies are one of them, although they are unregulated in the country. Peer-to-peer lending (P2P Loan) is another modern investment vehicle gaining popularity. Unlike cryptocurrencies, it is legal and has the potential to give decent returns. This article will tell you everything you need to know about peer-to-peer lending.

What is peer-to-peer lending?

Peer-to-peer lending websites function like marketplaces. They connect people who wish to lend money with people who need money. It is a means for borrowers to receive money without having to go to traditional lenders, such as banks.

On many websites, the money that you deposit for peer-to-peer investing is automatically distributed among multiple borrowers. However, on other peer-to-peer lending platforms, you have the option of choosing who you want to lend your money to. (P2P Loan) Peer-to-peer loan interest rates are often greater than those offered by regular savings accounts.

How does peer-to-peer lending function?

Peer-to-peer lending has a simple mechanism. All the operations are completed on a mobile application or website. The following steps outline the general peer-to-peer lending process:

• A prospective borrower fills out an online registration form on the peer-to-peer lending platform to apply for a loan.
• The platform evaluates the application and evaluates the applicant's risk as well as credit rating. A suitable interest rate is then applied to the applicant.
• When the registration is authorised, investors on the P2P lending platform provide the applicant with the available options based on his credit rating and allocated interest rates.
• The candidate should consider the various possibilities and select one.
• The candidate is accountable for paying interest regularly and returning the principal amount when the loan matures.

Pros and cons of peer-to-peer lending

Borrowers and lenders benefit from peer-to-peer lending in the following ways:

• When compared to other types of investments, P2P lending offers investors higher returns.
• Peer-to-peer lending is a more approachable source of revenue for some borrowers than traditional loans from banking institutions. It could be due to the borrower's poor credit score.
• Because there is more competition among lenders and there are fewer origination fees, P2P loans normally have lower interest rates.

Peer-to-peer lending does, however, have a few drawbacks, such as:

• Peer-to-peer lending carries a significant risk of default. Many individuals who seek P2P loans have poor credit scores, which prevent them from obtaining a traditional bank loan. As a result, investors must be aware of this risk when investing in a borrower.
• There is no insurance or government security in place.  If a borrower defaults, the government does not offer insurance to the lenders.
• Some authorities prohibit peer-to-peer lending or impose investment requirements on enterprises that provide such facilities.

P2P loans are like instant personal loans but without much authorisation. It is best to get a loan from a conventional bank if you need money. IDFC FIRST Bank gives instant personal loans with the major benefits of a P2P loan, but with added security. You can also check you EMI amount with IDFC FIRST Bank’s personal loan EMI calculator. Simply enter your loan amount requirement, period for which you want. The fact that you can get personal loans online proves that bank loans are on equal footing with P2P loans.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.