Peer-to-peer (P2P) lending is a financial system where individuals borrow from and lend to each other directly through online platforms, bypassing traditional banks. Borrowers submit loan requests, which P2P platforms vet and assess for creditworthiness using traditional and alternative data. Lenders then fund the loans in small portions, earning interest on the loan repayments which are collected and distributed by the platform. This model offers potential for higher returns for lenders and accessible loans for borrowers, but it also carries risks, primarily credit risk from borrowers, and is not government-insured.
How it works
1. Sign up: Both borrowers and lenders register on a P2P platform.
2. Borrower profile: A borrower applies for a loan and provides documents like PAN, Aadhaar, bank statements, and income details.
3. Credit assessment: The P2P platform evaluates the borrower’s creditworthiness, credit history, income, and other factors, often using alternative data sources, and assigns a risk grade and interest rate range.
4. Loan listing: The approved loan is listed on the platform with its details.
5. Lender funding: Multiple lenders can choose to fund small portions of the loan based on the borrower’s profile and their own risk tolerance.
6. Loan disbursement: Once funded, the platform disburses the loan to the borrower.
7. Repayment: The borrower repays the loan through monthly EMIs to the platform.
8. Distribution: The platform distributes the EMI payments to the respective lenders, minus its fees.
Benefits
- For borrowers: Potential for faster and more accessible loans, especially for those who may not meet traditional bank criteria.
- For lenders: Potential for higher returns compared to traditional savings options, and direct control over who they lend to.
Risks
- Credit risk: P2P loans are unsecured, and there is a higher probability of borrower default, as many applicants may have low credit ratings.
- No government insurance: Unlike bank deposits, there is no government insurance to protect lenders in case of a borrower default.
- Liquidity: P2P lending is generally less liquid than the stock market, meaning it can be harder to withdraw your money quickly.
- Regulatory oversight: While regulated by the RBI, the specific rules and the platforms themselves are still evolving
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