When you think about getting a loan, banks and NBFCs might be the first options that come to mind, but guess what? There is another alternative available, known as the peer-to-peer lending system or P2P lending. This lets you borrow directly from individuals or investors through online platforms. It is a fresh way to get loans with potentially lower rates and a simple process.
Scroll through to learn more about this lending platform, its benefits, how to choose the ideal P2P lending platform, and more.
How Peer-to-Peer Lending is Revolutionising Traditional Banking?
Traditional banking has long held a dominant role in the world of finance, providing services such as loans, savings accounts, and investment opportunities. However, the emergence of peer-to-peer lending has revolutionised the landscape.
These digital platforms connect borrowers directly with lenders, bypassing the traditional banking system. By operating solely online, the need for expensive physical branches, staff, and regulatory compliance is eliminated.
Unlike banks that heavily rely on credit scores and collateral, these lending platforms assess creditworthiness using alternative methods, such as income and employment history. Thus, peer-to-peer lending startups are transforming banking by offering borrowers more accessible financing options.
Benefits of Peer-to-Peer Lending
The following highlights the benefits of peer-to-peer lending platforms:
Helps Diversify Your Portfolio
Peer-to-peer lending helps you diversify your funding sources. Instead of relying only on banks or personal savings, you can tap into a network of individual lenders. It not only reduces risk but also gives you access to a broader pool of capital, helping you navigate any challenges in the lending market.
Allows Lower Interest Rates
P2P lending is a wiser choice as it offers lower interest rates than traditional banks. By connecting you directly with investors, the peer-to-peer lending platforms reduce costs, providing more competitive rates. For instance, a Personal Loan at 10% interest on a P2P platform can beat a traditional bank’s offer of 15%.
Extends Flexible Loan Terms
Unlike rigid terms from traditional banks, these lending platforms give flexibility. You can customise your loan based on your needs, choose the amount, repayment period, and monthly instalment. This empowers you to find a loan that fits your financial situation.
Allows Quick and Convenient Application
P2P platforms make loan applications hassle-free. You can apply online without excessive paperwork or bank visits. You just need to provide basic information like income verification and credit score for a streamlined process, often resulting in instant approval or swift fund disbursal.
Offers Access to Funds Easily
Unlike traditional banks, peer-to-peer lending platforms consider various factors for creditworthiness. While credit score matters, P2P lenders look at income, employment history, and even social reputation on the platform. It indicates that if your credit score is low, you still stand a good chance of securing a loan.
How to Choose the Right Peer-to-Peer Lending Platform?
Here are some essential factors you should consider before choosing the right peer-to-peer lending platform:
- Reputation
When picking a peer-to-peer lending platform, prioritise its reputation and track record. Choose platforms with over a decade of experience and a proven history of successful borrower-lending connections.
- Risk Management
Assess the risk management measures of the platform. You must ensure that they use advanced tools to evaluate creditworthiness and transparently share the rates and risk mitigation strategies.
- Loan Variety and Investment Choices
Various platform presents different loan categories, including Personal Loan, Business Loan, and debt consolidation loans. They also offer investors the flexibility to pick between automated investing or manually selecting loans, allowing you to customise your investment strategy based on your preferences.
- Fee Structures
Before committing, understand the fees associated with the platform, as they can impact your returns. For instance, some platforms charge annual servicing fees or origination fees. So, carefully review and compare fee structure to align with your investment goals.
- Customer Experience
Consider the platform’s customer support and user experience. Opt for platforms with a user-friendly interface, responsive support, and access to comprehensive investment data.
What Are the Risks Involved in Peer-to-Peer Lending?
The following points highlight the risks associated with P2P lending platforms:
- Uncertainty in Loan Approval
Peer-to-peer lending startups may have different criteria, creating uncertainty in loan approval. While they consider various factors beyond credit scores, there’s no approval guarantee.
- Potential for Higher Interest Rates
One of the significant risk factors of P2P lending is higher interest rates. If you have lower credit scores or more significant loan amounts, you may experience higher interest rates.
- Limited Loan Amounts
Peer-to-peer platforms often have borrowing limits, posing a challenge for those needing significant funds. Hence, assess whether the available loan amount meets your requirements.
- Potential for Higher Default Rates
P2P lending platforms carry the risk of higher default rates, especially for borrowers rejected by traditional lenders. While some platforms have screening processes, the risk remains, affecting credit scores and platform sustainability.
Step-by-step Guide to Joining the Peer-to-Peer Lending Movement
Here is a step-by-step procedure you need to follow to join the peer-to-peer lending movement:
- Step 1: Explore different P2P lending platforms to find one that meets your loan needs, offering competitive rates and favourable terms.
- Step 2: Sign up on your selected peer-to-peer lending platform by providing basic personal information like your name, address, and social security number.
- Step 3: Complete the loan application by providing essential details such as the loan amount, purpose, and repayment term. Some platforms may request additional information like income verification.
- Step 4: After submitting your application, the lending platform will review it to decide on loan approval. If approved, you will receive a loan offer with details like the loan amount, interest rate, and repayment term.
- Step 5: If satisfied with the offer, accept it and provide any necessary additional information to finalise the loan.
After accepting the offer and completing the above steps, the funds will be deposited directly into your bank account.
Also Read - What is Personal Loan? Things You Should Know
To Conclude
The emergence of peer-to-peer lending companies has completely reshaped the traditional banking sector, bringing about a range of benefits such as improved accessibility, reduced expanses, and enhanced transparency.
However, before exploring peer-to-peer lending further, you can also consider Poonawalla Fincorp for your loan needs. We provide a range of quick, transparent, and hassle-free loan options, including Personal Loan, Business Loan, and more.
