With peer to peer lending quickly gaining traction in India, we give you the lowdown on what it’s all about and how you can get in on the action.
Peer to peer (P2P) lending has become quite popular in the recent past giving tough competition to banks that offer Personal Loans. It has gained traction after the Reserve Bank of India (RBI) issued guidelines for the regulation of P2P lending.
By investing in a P2P firm, or rather by lending money to a P2P firm, you can get good returns. Yes! Just like you lend money to your family and friends, you can lend money to P2P platforms and the money will be given to borrowers while you get returns. Sounds similar to Fixed Deposits or Mutual Funds? Maybe. But far riskier!
Interested? Let’s give you the details.
What Is It?
P2P lending is where a borrower gets money from multiple lenders. Unlike traditional loans that you get from lenders, here you can get smaller amounts from many lenders.
So, how do you lend money? You can choose to fund a borrower as a P2P investor. For example, if a borrower requires Rs. 1 lakh for his business, emergency or any other purpose, they have to mention their requirements on the P2P platform. Based on the details, P2P platform will decide the interest rate for the loan.
Additional Reading: Everything You Need To Know About P2P Lending
As a P2P investor, you can choose to fund the borrower’s money needs if you think you will earn enough money from it. So, typically a P2P lending platform will help match borrowers with lenders. Both you, the lender and borrower pays a fee to the platform.
How To Lend?
Just visit the P2P website and register yourself as an investor. Pay the required charges and you might be asked to link your bank account to your P2P account. Choose from the list of borrowers posted on the P2P website. You can then transfer funds to the borrower and start earning income as soon as the borrower starts paying interest on the loan.
Play By The Rules
RBI has said that P2P lending platforms will be treated as Non-Banking Financial Companies (NBFC). The P2P platforms have to obtain a certificate of registration. Those who want to register should have a minimum capital of Rs. 2 crores.
Note that lenders should not have exposure of more than Rs. 10 lakhs across all P2P platforms. Your exposure as a lender to a single borrower should not be more than Rs. 50,000 and the maximum loan tenure has to be 36 months or less.
Additional Reading: Loan Against Property Vs. Personal Loan
RBI has also said that all P2P fund transfers should be through escrow account mechanisms. Therefore, these transfers can be done only using bank accounts. RBI has strictly prohibited cash transactions.
Get Those Returns
Interest rates charged will differ based on the borrower’s risk profile and requirements. So, your returns will also vary based on the borrower that you choose. P2P platforms like Lendbox and i2ifunding are said to give returns of anywhere between 15% and 36%.
Are There Any Advantages?
As a lender, you can start with as little as Rs. 5,000 and get returns that are much more than those of traditional investments.
It’s Highly Risky
Presently, P2P lending offers loans to individuals as well as businesses. However, there are more businesses accessing this kind of funding rather than individuals. It makes lending quite risky.
Also, P2P lending is not exactly like a bank loan. The risks of defaults are much higher. This means that the borrower might not pay the interest or even worse, may not repay the loan. This means you might not get any returns at all.
Additional Reading: Best Equity Mutual Funds To Buy In 2019
What To Do?
You can lower your risks by choosing low-risk borrowers. Usually, the P2P platforms categorise borrowers as high-risk, medium-risk and low-risk. They consider factors like Credit Score, tax statements, bank statements and other income documents to categorize them. Choose the borrower carefully.
Also, some P2P platforms provide capital protection to their investors. You can consider this in case you don’t want to risk all your money. Try talking to other investors about their experience. This will help you find out how risky the P2P platform is.
Pay Taxes
Your income from P2P platforms will be considered as ‘income from other sources’. This will be taxed as per your tax slab.
As you can see, P2P lending is highly risky, involves high taxes and your returns can fluctuate. Mutual Funds can offer you better returns and are less risky. What’s more? SIP starts at Rs. 100. So, invest in a Mutual Fund now!