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P2P Loans: All you need to know before applying

Practice of giving and taking of loans is as old as money itself. What's modern is the ease of comfort and scale of loaning, being afforded by the modern age technology. Ten years ago, an individual needing a loan to start a business, consolidate debt, or cover unexpected home improvements would have limited options to borrow from his or her known friends, family, and acquaintances outside of a traditional bank loan. Today, online peer-to-peer (P2P) lending platforms connect individuals who need to borrow money with investors willing to lend their money, across the length and breadth of India. Thanks to modern age Internet based technology, which has made possible seamless transactions of loaning among unknown borrowers and lenders through lending platforms like P2P Lending platform. The loans transacted on these platforms are well evaluated and priced to match the risk & reward commensurate to the credentials of borrowers and expectations of lenders. Needless to say, such transactions are now possible to complete on online / on-time basis. Since these are technology based transactions, huge cost benefits are generated compare to conventional banking channels; both for lenders and borrowers.

For many borrowers, borrowing from peers can be a great alternative to borrowing from a bank, but it's not for everyone. We'll look at how peer-to-peer lending works and what you need to know before you apply.

How P2P loans platform works
Individual investors, including HNIs may provides their savings as small as less than Rs. 1000 upto 50 lakh per Income Tax Pan-card to lend as personal loans to individuals / MSMEs of their choice, matching their risk reward expectations through any of the RBI registered P2P lending platforms.

Potential borrowers can apply for their Loan requirements to meet their Personal or Business financial needs on these platforms. Once applied each of the borrowers has to pass through various credit norms of the platform. Most of P2P lending platform, uses their own algorithm and AI / ML based selection process. Once being approved by the credit and other parameters, their loan requirements get listed on their platform to enable their lenders to select and fund it. The amount of loan, rate of interest and tenure is always subject to the quality of the borrower creditworthiness.

For E.g. For a personal loan requirements, they will give you a grade between P1 (the best grade, qualifying for the highest amount at the lowest rates) and P7 (the lowest grade with the highest interest rate)Or for a business loan requirements they will grade you between B1 (less risky profile, good bureau score, low interest rate) and B7 (more risky profile, mediocre bureau score, with higher interest rate).

Who invests in P2P Loans
P2P loans may be funded by an individual investor or a group of investors. P2P loans is a very good investment opportunities available to investor to look for a high return on their investments by taking reciprocal risk of their choice. Great way to diversify the portfolio for an investor. Such investment at P2P lending platform lead to regular cash-flow to the lender through receipt of.

P2P loans are an income investment because once an investor opens an account and chooses to participate in a loan, principal and interest payments (less fees charged by the platform) are deposited into the investor's account / wallet on a monthly basis. The return on P2P lending in a way is fix and visible to plan one's future cash outflow. This help lender to manage their cash-flow by investing in the P2P loan of their choice as per selection of risk and tenure. Most of the P2P loans vary from 3 months to 36 months and accordingly lender can select the borrowers of his choice to catch his future cash outflow.

Applying for a peer-to-peer 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.

Bureau score
Bureau score (Credit score) is an important factor for approval of personal loans / Business loans (MSME loans). It is basically a three-digit numeric summary of an individual's credit history. While P2P lending platforms don't solely rely on Bureau score, it is often a part of one of the important parameters they use to evaluate merit of the borrowers.

Applying for the loan
The application process is quite simple, once you have made your decision. Lenders / investors judge you on the basis of a typical parameters and don't require a long-drawn-out process to apply. You will need to provide the standard 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. Providing relevant information truthfully and in one go assures early decisioning and disbursement of loan.

Loan Approval
Once you have applied for personal loan and provided the necessary documents, the P2P platform will complete the verification process at its own end. The P2P platform will check your credit score, history and various other parameters before qualifying your profile. Most of the platforms assign a loan grade based on 600-900 credit evaluation parameters as part of their process.

You can boost your chance of getting loan approved with

  • An excellent credit score
  • A low percentage of total outstanding debt compared with income (Debt-to-income ratio)
  • A long history of credit with significant successful credit lines
  • No bankruptcies
  • No accounts currently in collections or delinquent / no delinquency in payment of EMIs of existing loans, etc.

Is it Safe to Borrow With P2P?
Yes, In India P2P lending platform are mandatorily required to be registered with RBI (Reserve bank of India). There is Guidelines issued for their operations and they are strictly required to follow the Rules and Regulations framed for their operation of business. Most mainstream lenders are consumer-friendly, one need to see the background of the management and promoters and their Board of Directors to ensure their experience of banking / Finance.

  • Data: All leading P2P lenders guard your information as securely as any other financial institutions /banks do, and all communication on the platform generally takes place through an encrypted browser session or app.
  • Privacy: Your identity is always kept confidential from individual lenders and is made available only through loan agreement. The borrowers and lenders before selecting the P2P lending platform of their choice may go through the privacy policies of the platform carefully to understand what information investors receive. Privacy Policy of all the platform is compulsorily required to be on the front page of their website.
  • Rates: Interest rates are typically competitive with those you can find elsewhere. You'll almost certainly pay less with P2P lending platform than you would for a salary loan.

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 regulated by RBI.

The bottom line is that P2P is another option, and more options and increased competition are always good for borrowers. To know more about P2P lending platform or evaluate your requirements of Lending and borrowings you may visit to; India's leading Peer to Peer lending platform.

The author is credit manager of The article (blog) written by her is in her personal capacity and education in nature. All the views are personal views of the writer., the peer to peer lending platform has placed the articles to benefit the general borrowers and lenders through an exercise of educational efforts of the lenders.


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