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How Does Peer To Peer Lending Work? Research Team | Posted On Monday, April 04,2016, 06:45 PM

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How Does Peer To Peer Lending Work?



You need money urgently to start a business. You have knocked the doors of several banks, pleading for a business loan. After reluctantly listening to you, no bank has sanctioned you a business loan. You are fed up. You no longer have the energy to knock on bank’s doors. Your dream of a roaring business and a bright future are all but gone. One thing is certain….You have the talent…You know deep down in your heart, your business will definitely succeed….Only if you had the money to start this business.

This is when you learn of a special type of lender, who might be the way out of your problem… peer to peer lending also called P2P, could see you as a businessman.

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What is P2P Lending?

P2P lending is not something new in India. You might have borrowed money from family and friends in an emergency. The only difference in P2P lending is, you have to repay the loan with interest and you do not know the lender. P2P lending is nothing but an online platform, where lenders are connected to borrowers.

The loans you can avail from an online P2P lender, are of three categories. Microfinance, Consumer loans such as personal and education loans and commercial loans (loans to start a business).

See Also: All You Need To Know About Home Loan Down Payment And EMI

How Does Peer To Peer Lending Work?


If you want to avail a loan from a P2P lender, you will have to scan and upload your documents such as PAN card, your Aadhaar card and your passport. This is your identity and address proof and part of KYC (Know Your Customer). You will also have to show proof of income. This could be your 6 months bank statement, three months salary slip and ITR (You should be filing your income tax returns). Your documents are verified by the P2P lender. If the lender is satisfied with your documentation, you can register yourself on the online P2P lender.

To register yourself, you will now have to pay a registration and a processing fee. You will have to pay a registration fee of around INR 500 to INR 1500. The processing fee is around 1% of the loan you avail. Why do P2P lenders charge a processing fee? P2P lenders only want serious borrowers to avail loans from them. They do not want to waste their time. Paying a registration fee means, the borrower is serious on availing the loan. P2P lenders also have verification costs, which are covered by the registration fees.

P2P lenders also check your credit score. They have tie ups with banks and NBFC’s and can easily access your credit score. Some P2P lenders might even ask you to get your credit score from cibil (or any other credit bureau), and upload it. P2P lenders also have what is known as the social score. They have software which helps them check your connections on networking sites, such as LinkedIn. They also check your friends and what you are up to on social media sites such as Facebook. If you are an extravagant spender, P2P lenders would come to know about it, through social media. P2P lenders then assign you a social score.

You are slotted into categories based on your risk profile. If you are in the high risk category you will get loans, but at a higher interest rate. If you are in the lower risk category you will get loans, but at a lower interest rate. You can avail a personal loan of amount anywhere between INR 25,000 to INR 5 Lakhs. You can get a business loan as high as INR 30 Lakhs. The tenure (time period) of the loan, is anywhere between 6 months to 5 years. Interest can be around 12% to 36% a year, depending on your credit profile.

Why Would You Want to Lend On a P2P Platform?

You invest your hard earned money in a fixed deposit. What do you get from it…About 7% to 7.5% interest a year? If you lend your money on an online P2P Platform, you could get much more. You would have to do your KYC (Identity and Address proof), just like a borrower. Most P2P Platforms do not charge you (lender), a processing fee or even a registration fee. And yes…P2P lenders protect your money. Apart from thoroughly verifying borrowers, P2P lenders do not allow you to lend to only a single borrower. The risk is too high. If the borrower defaults on the loan, you would suffer. To protect you, P2P platforms state that the loan requirements of a borrower, need to be funded by between 3 to 5 lenders. This protects you. You are lending to different borrowers (say 3 to 5 borrowers), and if one of the borrowers defaults, you still gets your interest and principal from the other borrowers.

You can lend to borrowers on the P2P Platform, who do not have a high rating and can charge them higher interest. You can also choose to lend to borrowers who have a good credit rating, but get a lower rate of interest from them. Generally you can diversify your lending portfolio, by lending to both kinds of borrowers, high risk and low risk. Sometimes lenders can also ask you to bid for a loan.Borrowers pay you through cheque or net banking. If a borrower defaults on his payments, he is charged a penalty. If the borrower defaults on the loan, recovery is done by a third party.

Yes…Your loan is never far from you with P2P. Time to shake hands and avail that loan.

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