What is the loan between individuals? Here are 5 things to know

The P2P lending arena continues to expand with new players like Cred and BharatPe entering the fray. Here are the five critical points of this new field.

1. How do P2P platforms work and what do they offer?

Peer-to-peer lending is a mechanism that connects individuals in need of credit with other loans to lend. The platforms act purely as an intermediary or a market that connects borrowers and lenders. You can register as a borrower or lender on any platform after going through a verification process by providing the relevant details. As part of the process, borrowers will be required to undergo a risk assessment and pay a flat registration fee. Once registered, investors can contact listed borrowers and vice versa. Some P2P platforms will automatically make loan offers to borrowers who match your loan criteria on your behalf, while others will ask you to do so manually.

All proposals are accepted on a first come, first served basis. The interest rate usually ranges from 10% to 28% and the loan term can range from 3 months to 36 months. Once an agreement is made between the borrower and the lender, a legally binding contract is signed by them digitally. The loan amount is then transferred to the borrower’s account and the borrower makes periodic repayments through EMI over the stipulated period. If a borrower does not pay an IME within a stipulated time frame, a penalty is imposed on the borrower and is payable directly to the lender.

2. How are borrowers rated?

P2P platforms do not assess borrowers on the basis of a credit score. These perform their own set of checks to assess creditworthiness. Besides the usual checks regarding employment, income, credit history, etc., these rely heavily on technology to capture the personal habits of borrowers by tracking social media activity, usage of applications, among others. Based on the details entered, borrowers are usually assigned different risk brackets based on their creditworthiness. This serves as the basis for determining the amount and duration of loan eligibility, the interest rate payable, etc. Some platforms offer borrowers the option of selecting a loan according to the assigned risk category and paying the predetermined interest rate or asking potential lenders to bid on suitable interest rate.

3. Are these platforms regulated?

All P2P platforms fall under RBI regulations. All players must register to obtain an NBFC-P2P license to provide P2P lending services. The regulations cover the scope of activity of P2P platforms and prescribe certain prudential standards to be followed by them. Under the rules, no borrower is allowed to borrow more than 10 lakh at any time, on any P2P platform. Similarly, a lender can not at any time set up more than Rs 50 lakh on these platforms. In addition, the exposure of a lender to the same borrower, on all P2P, cannot exceed Rs 50,000. No loan can be sanctioned for an occupation period beyond 36 months. No loan can be disbursed unless the individual lender has approved the loan recipients and all affected participants have signed the loan agreement.

4. What is the level of risk for lenders?

These platforms are mainly used by individuals who do not meet the loan criteria prescribed by traditional lenders. The security of your principal depends in part on the risk assessment capabilities of the P2P platform. Also, the loans are unsecured by nature. Considering the nature of the loans and the profile of the borrowers, a great risk is the non-repayment of the loan by the borrower. The platforms do not guarantee the full repayment of the principal or the interest thereon. In the event of a default, the platforms assist with the collection and filing of legal notices, but cannot guarantee a positive outcome.

To be safe, the P2P platform is required to disclose all the details about the borrower including personal identity, amount required, interest rate sought and credit rating assessed by it. At the same time, the personal identity and contact details of the lender remain confidential. Under the rules, the P2P platform is not allowed to hold the funds invested by the lender or repaid by the borrower. These funds must be held in an escrow account, so that the platform itself has no access to the money.

5. What can lenders do to mitigate risk?

Do not blindly rely on the interest rate offered. Carefully review borrower profiles before approving a loan. At the same time, do not fully rely on the risk assessment of the P2P platform. For this reason, do not limit your exposure to a single borrower. Spread your expenses over several borrowers to reduce the impact of defaulting a few. Continuously monitor the borrower’s risk profile.

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