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High returns of P2P lending may look attractive, but what are the risks?

Adhil Shetty

Peer-2-Peer(P2P) lending is a new investment vehicle that offers attractive returns, though it does come with risk. The loans offered on P2P platforms are unsecured and hence, yield higher interest income. But, investing in P2P lending without learning about its nitty-gritties can burn your fingers. Here’s a brief on P2P lending.

What Is P2P Lending?a

P2P lending is a way of loaning your surplus funds to borrowers listed on the P2P lending platform in consideration of interest. Borrowers on the P2P lending platform are on the lookout for short-term funds and are charged higher interest rates compared to that by traditional lenders. The interest rates usually vary from 12.5% to 35%.

To regulate the activities of P2P lending, the RBI has laid certain guidelines with a view to protect the lenders’ and borrowers’ interests. To begin, all P2P platforms must obtain a license from RBI to start matching lenders with borrowers. So, invest in only licensed P2P platforms to safeguard your money.

Next, the guidelines mention the minimum and maximum loan amount and tenor. As a lender, you can only lend loans amounting from Rs.25,000 to Rs.10 lakh for a tenor ranging from 3 to 36 months. These terms of lending vary across P2P platforms. Also, as a lender, at any point in time, you cannot lend an amount exceeding Rs.50,000 to the same borrower across all P2P platforms.

Pros And Cons Of P2P Lending

As an investor, you can enjoy the following benefits through P2P lending:

  • The process to start lending is simple and you can start with a small amount of just Rs.5,000
  • You can arrive at the right lending decision by analysing borrowers’ profiles on the P2P platform
  • To maximise returns and minimise risk, diversify your portfolio across borrowers carrying various risk levels

Even so, P2P lending has the following drawbacks:

  • You can lose your capital should a borrower default
  • Your capital can also be compromised if you lend on a P2P platform that is still in the process of applying for a license and shuts down the operations
  • You can run a great loss if you lend on unregulated P2P platforms offering Ponzi schemes

What’s In Store For Borrowers?

P2P lending platforms process and approve loans quicker than traditional banks and NBFCs. Therefore, you can apply on various P2P lending platforms in times of immediate requirements. Also, since the loans are unsecured, you don’t have to pledge collateral. The downside is that P2P lending platforms don’t accept loan applications easily, so you need to have a good track record of repayment. Secondly, if your credit profile is bad, you may have to pay very high interest.

When it comes to P2P lending, invest based on borrower’s risk profile to safeguard your principal while also earning good returns.