By Kumar Shankar Roy
Peer to peer lending is changing the way India borrows and lends. Top platforms, including Monexo, are driving this paradigm shift. Lending cannot start without a lender. In a sense, lenders are the life-blood of this alternative financial system that is giving banks a run for their money. Those who tried it, have seen how P2P lending makes it possible for investors to realize the benefits of high returns without paying a large blob as bank fees.
But, peer to peer lending is still new in India. Just a couple of years into being a strictly regulated industry, the peer to peer lending sector needs for more investors to aware of its benefits. Due to the lack of awareness, there are a lot of myths and half-truths floating around. These may be stopping many prospective investors, who are generally tired of poor returns from traditional asset classes.
If you are a beginner in this exciting world, there are 5 things you absolutely must know to clear any doubts or confusions that you may have. Read on.
1. P2P returns are not casino-like; they can be boringly consistent
Peer to peer lending platforms act like a market where lenders and borrowers meet. If they choose each other, a p2p loan happens as per laid out rules. There is no betting or casino-like deals here. Just to be clear, there is no 100% return or doubling money involved in a day or ten. Borrowers take money and repay every month in a structured way.
Generally, one can expect 15% annual return in peer to peer lending. This pace of financial return is more than what equity, fixed income, gold or any other asset class offers. If you are looking for more excitement or returns from your investments, peer to peer lending is not for you. Often, p2p lending can be boring. There is no huge bonus paid at the end of the loan term. Just like any other loan, peer to peer lending is all about consistent payments.
To have a look at how the p2p loan portfolio is doing at Monexo,click here for the performance sheet.
2. Borrowers can't simply vanish with your money
Indian banks have proven to be quite inept at protecting their loans. Rich businessmen have vanished overseas. Year after year, this is the story of how Indian banks have betrayed the trust reposed by the deposit holders. This, however, is not how peer to peer lending works.
While banks due to their legacy old systems realize that loans are not being paid often after months or years and some bank officials are hand in glove with such defaulters, p2p platforms don’t have such problems.
Firstly, the lending system is completely devoid of any p2p officials. You as the lender choose whom you want to lend, or don't want to lend. You decide, always.
Secondly, p2p platforms, like Monexo, track all repayments like a hawk. All borrowers are required to provide auto-debits to their bank account for their monthly repayments. They are given monthly email reminders prior to their payment due date.
If the borrower does not transfer money by due date, then reminders are sent by email and phone calls. Next, a late payment fee of Rs 1000 is charged for payment after the grace period. An additional penal interest of 3% per month calculated on a daily basis till the date of receipt of the amount due is also charged. Monexo also starts the collection process and initiates legal actions in connection with the loan. It is your money, but a lot is riding on peer to peer platforms too.
Lender testimonial: Watch private equity professional Mr. Rakesh Sony talk about his experience as a P2P lender with Monexo
3. Secondary market allows you to exit before loan tenure
In mutual funds, you can redeem units anytime. Bank fixed deposits can be broken before maturity. Gold can be sold anytime. But does peer to peer lending allow you to exit half-way? Yes, this happens. Lending to p2p loans does not mean your money is stuck till the borrower pays. Only a handful platforms like Monexo allow you to use the secondary market. This mechanism allows lenders to sell their investment orders.
Under normal market conditions, the secondary market typically sells investment order within a few days. This means all it takes for you to exit is a few days, at maximum. You will receive an email notification when the transaction is complete.
If you are worrying about the payment, just relax. The proceeds from the sale of investment order are credited to seller's escrow account. Sellers of a p2p loan are free to enter any selling price. The price can be either at par, at premium or at discount to the principal outstanding and interest due.
Additional reading: Planning to invest on a P2P lending platform? Avoid these 6 common mistakes
4. New loan borrowers may be good credit
It is often said that peer to peer lending is all about giving loans to new borrowers. This is partly true. Not everybody who comes to p2p platforms is a new borrower. But being a new borrower isn't a bad thing for lenders like you.
India’s demographics are changing. Borrowers are getting younger, just as many young people are becoming wealthy. As many as 80% Indians lack access to credit. Would you believe that this is because the lack of a credit score? Yes. The traditional financial systems run by banks serve only those who have a loan record history. What if somebody hasn't taken a loan earlier, but wants to now?
New to credit borrowers can turn out to be as credit-worthy like many experienced borrowers. They may not have a borrowing history. So, credit bureaus don't know much about them. Not knowing about them doesn’t make them inferior. Many of them can be good credit.
Platforms like Monexo offer "My First Loan" to such borrowers after doing a stringent screening. These loans are priced higher and as a lender you can earn superior returns when compared to a loan that has belongs to a borrower with a credit score.
Additional reading: 5 main pitfalls when you lend money to family / friends
5. P2P loan investments can be made into a portfolio
It is not just stocks and mutual funds that can be used to make a portfolio. Peer to peer lending loans given by you can be arranged in a portfolio. A portfolio approach in fact is the best way to do investments. Diversification is a key feature in peer-to-peer lending.You can construct a portfolio by lending small amounts to different loans/borrowers. This is much better than funding one loan in entirety. By increasing the number of borrowers, your risks as a lender are reduced.
On Monexo marketplace, you can lend as little as Rs 1,000 per loan. So, with the minimum investment capital of Rs 1 lakh, you can loan to 100 different borrowers in your portfolio. 100 borrowers will mean your portfolio will contain different risk profiles.
Do not forget to use the sort and filter functions. You can balance the risks and returns as you build a p2p loan portfolio. Ensure that you choose a mix of different peer to peer loan products, different p2p loan amounts, different loan Monexo ratings and different purpose of loan.
Conclusion: Prospective P2P lender/investors are showing interest in peer to peer lending. Many realize that this alternative investment is one of the best ways to earn superior risk-adjusted returns that easily beat inflation and leave a lot on table after paying taxes. But, they may be holding themselves back due to some misconceptions. In this article, we have explained 5 things you should know about P2P lending. If your doubt has been resolved, try your hand at p2p lending. Invest with Monexo P2P lending. Apply to be a P2P investor today.