- Date : 12/08/2021
- Read: 6 mins
Wondering if P2P lending can be a good investment opportunity? Read on for a quick evaluation of the entire process.
The word ‘peer’ may have multiple meanings but most commonly it indicates a companion or equal. So, when two peers help each other and also make a profit out of that deal, isn’t it a great thing for both?
Peer-to-peer (P2P) lending is flourishing in the market today as an alternative to the traditional banking system. While banks and financial institutions evaluate your financials before providing a loan, your peer can understand you better than any bank associate can. So, it is a win-win situation for both parties involved.
In this article, we will see how peer-to-peer lending can be utilised as an investment option, whether it is a safe investment option or not, and other related aspects.
What is peer-to-peer lending?
Peer-to-peer lending or P2P lending is a kind of debt financing. Individuals as well as business houses that are in need of credit can directly contact their peers, and if the peers are having surplus funds, they can lend the money. This is carried out on a marketplace rather like an exchange.
Multiple applications are available for P2P lending these days. Just as banks earn interest on the loans they disburse, the peers get returns on the money they lend. This way, both parties benefit from P2P lending.
Related: P2P lending 101: What is it and how do you go about it?
How does P2P lending work?
Before investing in P2P lending, you need to understand how it works. It is crucial for you to assess the risk factors and then invest wisely.
- The process starts with the borrower applying for credit/loan on the marketplace.
- They submit relevant documents to support the cause of availing credit, as well as the prospects of their business.
- The lender connects and assesses the risk of the borrower.
- Then the agreement is registered, mentioning all the information about the funding. Both parties (peers) need to sign this.
- The fund is transferred through an escrow account
- The borrower starts repaying as per the schedule
- The loan is recovered on behalf of the lender.
P2P lending involves a process that is completely online. Yes, a third party is involved in the Escrow account but this is to ensure the safety of the peers’ funds.
P2P lending versus traditional banking
There are a couple of basic differences between P2P lending and traditional banking. To begin with, P2P lending is completely technology-based, while traditional banking is still in the process of getting digitalised. Secondly, P2P platforms are more favourable for the end customer. Lenders get higher returns as compared to banks, which generate funds from lending money.
Can investment in P2P lending be profitable?
Considering whether to invest in P2P lending and wondering how you can make a profit out of it? Here are some benefits of P2P lending as an investment option:
- Low investment: You do not need lakhs and crores to invest in P2P. You can get started with a small amount, and as you understand the process better, you can increase your investment. You can start investing in P2P lending with just Rs 50,000.
- Regular income: If you are lending to your peers as an investment, it can be a source of regular income as well. Once the borrower starts repaying, you will get the principal amount as well as the return on it, which will be like a regular income for you.
- No volatility: The return rate is determined before the loan amount is disbursed. This is why there is no volatility in the return. It is not linked to market risk and the borrower is obliged to repay the principal as well as the returns decided on the same.
- Easy process: The process of investing in P2P lending is very easy. You just need to register on a platform that provides this service, apply for the loan amount and wait. As an investor, you just need to check the applications and the details provided and then you can begin lending.
- Higher returns: The best part of P2P lending is that you can earn a higher return than the traditional banks earn on their loans. Your portfolio can be well-diversified too.
- Risk involved: The primary risk of P2P lending as an investment is the borrower defaulting on their payments. It can be interest payment or both interest and the principal amount that the borrower doesn’t repay.
Peer-to-peer lending in India
The global P2P scenario is already ripe for lenders and investors. The market for P2P lending stood at $67.9 billion in 2019 while the anticipated figure for 2027 is $558.9 billion. It is expected to grow at a CAGR of 29.7%, which is one of the highest in the market at present.
The market for P2P in India has grown rapidly as well. In 2020, the growth in returns was around 10 times. The market grew at a rate of 25% which is huge. Another report suggests that P2P is going to be a $1 trillion market by 2050.
To sum up, this is indeed the right time to explore the P2P market if you are looking to diversify your portfolio and want to explore other markets for investment.
Some of the P2P players in the Indian market are 5Paisa Loans, Faircent, i2ifunding, Rupee Circle, and others. Amongst these, Faircent is the first-ever P2P lending company in India which got registered by RBI. Following the same, other P2P lending companies are now becoming registered P2P lenders.
The growth in P2P lending is apparent around the world and in India. This boom suggests that it is here to stay. Investing in P2P lending can be a bit risky as it is a comparatively new arrival in the market, but the risks can be mitigated with proper research and wise investment decisions.