Things to Know about P2P Lending

5 Key things to know before you become a peer-to-peer lender.

03 October, 2016

Are you an investor looking to become a lender on a peer-to-peer platform?

This is the right time to venture into this investing space. Peer to peer lending is steadily gaining ground as a popular investing avenue for investors looking to diversify their investments. There are many reasons why peer-to-peer lending is fast becoming increasingly attractive for the lender including favorable rates of interest and hassle-free transactions. Monexo is approached by prospective lenders everyday who are keen to learn more about peer-to-peer lending as an investing avenue. Here, we have put together the 5 key things every peer-to-peer lender should know before investing.
1. Be well informed about the platform you are dealing with:

The prospect of making quick and high returns on an investment as offered by the peer-to-peer lending system is enough to make any investor eager to start investing.

It is wise to answer the following questions before you start lending on a peer to peer platform– Are the loans secured or unsecured?

What are the interest rates offered?
How can you spread out your investments on the platform?
How long will it take before your loan is repaid fully?
Do you have the ability to redeem your investments and get your money back earlier than the stipulated period, if need be?
What happens if the borrower defaults?
What are the hidden costs and fees for transacting on a particular lending platform?

Once you answer these questions you are on your way to start lending.

2. Peer-to-peer lending is the fastest growing segment in the fin tech sector:

Peer-to-peer lending, also known as market place lending is in its lift off stage in India and happens to be one of the fastest growing segments in the fin tech industry. This kind of lending has graduated from individuals sourcing loans from private moneylenders to professional platforms in the form of peer-to-peer lending platforms where lenders fund loans to individuals and institutions online without any intermediary.

Peer-to-peer lending volume has more than doubled every year since 2010. According to a PWC report on the sector, marketplace lending will reach $1 trillion by 2025.

3. Yes, peer-to-peer lending is safe!

Peer-to-peer lending is an official form of lending and is an absolutely legal form of transacting loans. However, since peer-to-peer lending is a relatively new form of transacting, there is a lot of skepticism and misconception about how it works. In fact, since there is such ease in terms of transacting in peer-to-peer lending there are doubts regarding its efficacy and transparency.

The fact of the matter is that peer-to-peer lending offers a straightforward and safe option for lending money. Peer-to-peer loans are legitimate loans that have the same legal efficacy as a loan from a bank. Peer-to-Peer lending platforms or marketplaces are not yet recognized by the Reserve Bank of India as Non Banking Financial Institutions but the regulatory authorities do recognize the potential of this developing fin tech segment and the potential impact it can have on the financial services industry and therefore proposes to regulate such P2P players. The RBI, after reviewing the approach taken by regulators in different economies towards the P2P lending business, has proposed a broad outline of the legal approach to be adopted in India in its consultation paper released on 28 April 2016.

With all this regulatory work in the offing you can be rest assured that peer-to-peer loans are as safe as they are hassle free.

4. As an investor or lender you can diversify your investments on a single platform:

Every investor knows that diversification is the key to safe investing. Normally when a bank offers a loan it funds the entire loan for the borrower. As opposed to this, in peer-to-peer lending, once the borrower passes the screening process of the lending platform, his or her loan is made open for multiple lenders to ‘invest’ in. Investors or lenders are free to lend as little or as much as they want to, to different borrowers (The minimum investment amount on Monexo is Rs. 5,000). So in this way many peers can fund a single loan. But, the borrower only makes one monthly payment on the platform that is duly distributed to the lenders.

In this way, the lender gets to diversify its investments across many borrowers with the ease of recovering consolidated returns as facilitated by the lending platform.

5. Always read the fine print:

Last but no the least – as an informed investor, make sure to always read the fine print. Each peer-to-peer platform has different terms and conditions for its investors. Make sure you are fully aware of what you are getting into when you sign up as an investor on a chosen platform. This way you know exactly where you stand with respect to your risk and returns.