Complete P2P Lending Glossary: 16 Terms Every Lender Should Know

Understanding P2P lending isn’t just about lending money; it’s also about knowing the key terms that guide how the system works. Whether it’s risk levels, earnings, regulations, or borrower behaviour, each term plays a role in helping you make better decisions. This glossary simplifies all the important concepts in plain English so anyone can follow along.

How To Use This P2P Glossary?

These definitions are short, simple, and written for everyday lenders. To make it even easier, the terms are grouped into clear categories so you can understand P2P lending step by step.

Why Understanding These Terms Matters?

Knowing these P2P lending terms isn’t just theory; it directly impacts how safely and smartly you invest. When you understand the language of risk, earnings, and regulations, you make better decisions, avoid common mistakes, and pick platforms and borrowers with more confidence. Simply put: the more you understand, the better your money performs and the safer it stays.

A. Regulatory & Compliance Terms

These are the foundations of how P2P lending works in India. They explain who regulates the platforms, how money moves safely, and what legal protections exist for both lenders and borrowers.

1. NBFC-P2P

NBFC-P2P means Non-Banking Financial Company – Peer to Peer lending platform. It is a regulatory classification, regulated by the Reserve Bank of India (RBI). These platforms act as intermediaries that connect individual lenders and borrowers directly.

2. Escrow Mechanism

An escrow account is a safe & secure bank account managed by an independent trustee (usually banks) that handles all money movement between lenders and borrowers.

Transactions flow through escrow accounts separate for lenders and borrowers and never happen directly, which keeps lenders’ money protected, ensures every transaction is recorded, and maintains full transparency in the entire lending process.

Think of it as a safety locker managed by a neutral third party.

• When you lend, your funds go from your bank → escrow → borrower’s bank.
• When a borrower repays, the money comes back through the borrower’s bank → escrow → to your bank.
• The P2P Platforms cannot touch, hold, or move this money on its own.

3. T+1 Settlement

T+1 settlement essentially means that funds can not be held in the escrow account for more than one working day from the date of the transaction. This is applicable for any kind of transaction made to the escrow account, be it funds added by a lender or repayment transferred by the borrower.

As per recent RBI guidelines in 2024, P2P (Peer to Peer) lending platforms must follow T+1 settlement.

4. Loan Agreement

A loan agreement is a legally binding contract between the lender and borrower that lists all the terms & conditions, including the loan amount, interest rate, tenure, and repayment terms, etc.

B. Risk & Performance Terms

These terms tell you how healthy your P2P lending portfolio is. Think of them as the “vitals” of your lending. They help you judge borrower quality, understand repayment behaviour, and estimate how much risk you’re actually taking.

1. Risk Category

This is the risk label given to each borrower or loan. Platforms group borrowers into categories like Low Risk, Medium Risk, or High Risk. It’s based on factors like their income, repayment history, FOIR, credit score, financial stability, and financial behaviour. For lenders, this acts like a quick snapshot of the risk factor against each loan/borrower.

6. Bureau Score

This is the borrower’s credit score from agencies like CIBIL, Experian, or CRIF.
It shows how responsibly they have handled loans and credit cards in the past. A high score (700+) means better historical repayment behaviour; a low score indicates a higher credit risk.

7. Portfolio Diversification

Portfolio diversification is the strategy of spreading your capital across many borrowers instead of putting all your money in a few loans. Why? Because even if a few borrowers default, the rest keep your earnings stable. Good diversification reduces risk, smoothens your earnings, and protects your capital from big losses.

8. Non-Performing Asset (NPA)

An NPA is a loan that has not been repaid for 90 days or more. Once a loan becomes an NPA, it’s treated as a high-risk asset because the recovery rate drops significantly.

If you’re new to P2P lending, it’s important to check a few things before choosing a platform, like the platform’s past NPA (delayed or defaulted loan) history.

9. DPD (Days Past Due)

DPD shows how many days a borrower has delayed repayment. It’s a live indicator of risk. Even a small DPD jump means you should watch the borrower closely.

10. Principal Outstanding

Principal Outstanding is the remaining principal amount of the money that you have lent to borrowers, which the borrower still has to repay.

Example: If you lent ₹10,000 and the borrower has already repaid ₹3,000 of the principal amount, then the principal outstanding is ₹7,000.

C. Earnings & Return Terms

These are the terms that directly impact how much money you earn from P2P lending. Understanding them helps you track your income, compare, and make smarter lending decisions.

11. EMI (Equated Monthly Instalment)

This is the fixed monthly amount a borrower pays you. It includes both principal (your money) and interest (your earnings). Regular EMIs help you get a predictable monthly cash flow.

12. EDI (Equated Daily Instalment)

Some loans follow a daily repayment model instead of a monthly one. Borrowers pay small amounts every day, which means you will receive repayments from borrowers daily & start getting your money back faster.

13. Annualised Net Return (ANR)

Annualised net Return (ANR) tells you the real yearly return you earned after accounting for repayments, fees and defaults.

In short, ANR (Annualised Net Returns) shows the net annual return (%) you actually made, giving you the clearest and most accurate picture of how your money is performing across categories and platforms.

14. Absolute Return (%)

Absolute return is the total percentage you earned on your lent amount, without considering time.
Example: If you lent ₹10,000 and earned ₹1,000, your absolute return is 10%.

15. Annualised Interest Rate

This is the interest rate charged on the loan every year. It shows the cost of borrowing for the borrower. Platforms show it so you can compare different borrowers or categories easily.

16. Cash Flow Cycle

This refers to when and how often money comes back to you (daily, monthly). A shorter cash flow cycle means re-lending and compounding the growth of your portfolio.

Understanding P2P (peer-to-peer) lending becomes much easier once you know the basic terms used in the process. You don’t need to be great with finance; just knowing what things like risk category, NPA, ANR, or escrow mean can help you make better decisions. When you understand the words, you understand how P2P (peer-to-peer) lending really works. And that makes your lending journey smoother, safer, and more confident.

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