How Safe is it to Invest Money in Peer to Peer Lending?
Investors are often apprehensive about lending money online. However, it is quite safe due to risk diversification, borrower profile verification, transparency and RBI regulation.
The peer to peer lending in India, though growing popular as an alternate credit investment, is still in the infancy stage in comparison to that in China and the United States. Hence, the first-time P2P lending investors often worry about the safety of their money while lending money online.
While no investment is 100% risk-free, P2P lending is a safer option for the investors owing to the following factors:
You can start investing P2P lending with an amount as low as Rs.5,000. So, you are not putting a higher amount of money at risk in one go. You can start slow and test the waters before investing more.
Let’s say, you want to invest 5 lakhs. Now, instead of lending money online to one single borrower, you can disburse the amount between at least 3-5 borrowers. This will diversify your risk in case one of the borrowers defaults.
Borrowers’ Profile Verification
The peer to peer lending companies in India do an internal credit evaluation to verify their personal, professional and financial information, digitally as well as personally. They assess the creditworthiness of the borrowers and take care of the documentation. Hence, you are saved from the trouble of conducting due diligence on your own, which may not be possible due to lack of or limited resources.
All the communication between the borrowers and lenders happens online through the P2P lending site. You can get continuous updates on how your money is being invested. Hence, there is complete transparency in the entire process.
RBI has already proposed peer to peer lending in India as Non Banking Financial Institutions (NBFCs). It is in the process of regulating the sector to protect the interests of all stakeholders – lenders, borrowers and P2P lending platforms. The P2P lending companies would have to submit regular performance reports to RBI. Hence, the sector is expected to become more organized and transparent.
The ideal way to ensure the safety of lending money online is to first assess the P2P lending platforms on the various parameters listed, and invest only through a reputed and trustworthy platform such as LenDenClub.