Traditionally, banking is the channel that accepts funds from depositors and lends them to the borrowers. Banks and financial institutions act as intermediaries to manage these funds. But over the years, banks have paid considerably lower interest rates to the investors compared to what they earn from loans. This practice reduces the return on investment for the depositors.
Online peer-to-peer lending enables direct lending by removing the need for the banking channel. The peer-to-peer lending concept bridges the gap between investors by providing a common marketplace for one-to-one lending. As more investors start to invest through a P2P platform, the interest earned by banks as middlemen will directly reach the lenders.
If you are an investor and want to earn better returns on your investments, P2P lending online platforms such as LenDenClub can be your first choice. Flexible loan tenures, ranging from short to long terms allow you to invest according to your requirements. In addition to this, an RBI-registered NBFC-P2P, creditworthy borrowers, and an AI-powered auto-investment facility that operates based on the custom filters set by you make it the best choice for investment.
What is Peer to Peer Lending?
In simple words, direct lending and borrowing between individuals is called peer-to-peer lending. There are various terms used interchangeably for P2P lending like social lending, crowdlending, or alternative financing. While banks and financial institutions are the key players in the lending market, FinTech-powered peer-to-peer lending means investors can directly invest money through these websites acting as marketplaces for them to do so.
As an investor, you can get started with P2P investments by simply signing up on their website or mobile app and choosing a suitable plan for you. Once your KYC is complete, you can start investing. The P2P platforms facilitate investment by allowing enrolments only to creditworthy borrowers through a regulated mechanism.
But, is P2P lending legal? Yes! The Reserve Bank of India governs the operations of P2P lending platforms in India and makes rules and regulations for them.
1. How does Peer to Peer Lending Work?
In general, P2P platforms provide an active marketplace to the investors where they can find a customised list of borrowers according to their custom filters. Going a step further, P2P platforms like LenDenClub provide an AI-powered auto-investment option to you.
The platform automatically invests your money in the best investment opportunities by choosing this. Even the interest earned by you is automatically reinvested, providing the benefit of compounding on your earnings. It ensures that your money is always invested and doesn’t sit idle in the account.
1.1 The process of P2P lending in detail
Step 1: The P2P lending platform has to get an NBFC-P2P licence from the RBI for providing P2P lending services
Step 2: The FinTech intermediary opens a website, providing a marketplace for investors and borrowers to carry out P2P lending activities
Step 3: The lenders or investors can register with the FinTech company through their website or mobile apps available on iOS and Android. P2P websites conduct your KYC and your account is set up within minutes. At this stage, you can select any one of the auto-investment plans or the basic plan as per your preference
Step 4: By accessing your dashboard, you can check the best borrower profiles filtered by the website for you. LenDenClub performs detailed research on accounts of the borrowers, based on 200 unique data points. Through this exercise, they determine the risk; and calculate the eligible amount, loan tenure, and interest rate for each of the lending proposals. You can find the following details for each investment proposal on the website:
- Personal Identity: All the personal details of the borrowers, including names, ages, genders, and cities
- Professional Details: The borrowers’ types of employment, designations, employers’ names, and work experiences
- Financial Details: Income details and loan histories of the borrowers
- Required Amount: The amount required and the tenure of the loan
Step 5: You need to deposit the amount you wish to invest through the website. Interestingly, LenDenClub appoints a trustee for your funds. This means that the funds you deposit are kept in an Escrow Account, and all your transactions are carried out through it. LenDenClub doesn’t claim ownership of your funds. Hence, it acts as a facilitator for the transaction
Step 6: Based on your chosen plan, the website either auto-invests your funds, or you need to choose from the options available for investment. You can consider the borrowers’ details and credit histories before making your investment decision
Step 7: After the lending decision, all parties need to sign a legally binding contract, digitally. This contract contains all the loan details and terms & conditions in detail
Step 8: Money is transferred to the borrower through the Escrow account of the P2P lender where the amount is parked
Step 9: The P2P platforms charge a nominal fee from the interest earnings, and pay the balance amount to you
Step 10: The EMI received on your loans can be reinvested to earn the benefits of compounding. If you choose the auto-investment plan, as soon as the EMI is received, the AI matches new investment opportunities, and automatically reinvests your funds
1.2 RBI Regulations to be Followed by P2P Companies
What makes your investments safe? The RBI-approved P2P lending companies have to follow the prudential norms as well as the scope of business defined by the RBI. Here are the norms designed by the RBI to regulate the P2P business:
- A P2P platform needs to register with the Department of Non-Banking Regulations, Mumbai, and get an NBFC-P2P licence to open a marketplace
- A P2P platform cannot hold the money received from borrowers or lenders. Hence, the amount is kept in an Escrow account and transferred when required. The platform has a trustee for your fund transfers
- An investor can invest a maximum amount of ₹50 lakh at a time, across all P2P platforms
- The amount to be invested in one investment prospect is capped at ₹50,000. The purpose of this rule is to diversify the investment to reduce credit risk and reduce the exposure to one investment
- The minimum tenure of a P2P loan is 3 months and the maximum tenure is 36 months
To safeguard the funds of the investors and provide a robust investment environment, LenDenClub follows even more stringent norms:
- A thorough analysis of the borrowers and in-depth credit risk modelling by verifying 200 data points for each investment prospect
- Starting from a minimum investment of just ₹500, you can invest up to ₹2000 per borrower and enjoy the maximum diversification offered by the platform
- So, instead of investing ₹50,000 in one opportunity for the long term, you can invest this amount across 100 different borrowers. This diversifies your investment and reduces the risk
2. How Safe is Peer to Peer Lending?
In spite of all these points and advantages in favour of peer-to-peer lending, the common dilemma faced by investors is “should I invest in peer-to-peer lending?”, or “is it safe to invest in P2P platforms?” To get an answer to these questions, you need to understand the types of risks faced by P2P platform investors.
2.1 Risks Faced by P2P Investors
If you wish to reduce your investment risk, it is important to understand what are the risks faced by P2P investors. Here is the most important risk that is called Credit or Default risk.
Risk of Default: When the borrowers are unable to repay an EMI, it becomes overdue. If the EMI becomes overdue for 90 days, it is categorized as an NPA. This is called the default risk for an investor.
LenDenClub helps you to recover your debt and file a legal notice against the defaulter. They have a strong collections mechanism in place to help with recovery and calling support that helps investors make the most returns possible.
2.2 How Online Peer-to-Peer Lending Platforms Evaluate the Borrowers
Since the P2P platforms use their own set of checks and standards to assess the creditworthiness of borrowers, it is important to understand them. LenDenClub assesses a borrower on the basis of 200 different data points. These cover the creditworthiness of the borrowers on not just one parameter like credit score but across different parameters that include their personal and professional details and their credit history among various other details. This provides a holistic approach to assessing the borrower and helps list ones that have the capacity of repayment.
2.3 Tips for Investors Reduce their Risk on P2P Lending Platforms
- You should always invest in borrower profiles based on parameters that suit your risk appetite and help you in achieving your financial goals.
- Choose multiple borrowers. Limiting your exposure to 1 borrower can increase the default risk. Hence, choosing multiple borrowers can diversify your risk.
- More the diversification, better is the spreading out of risk.
- Start investments with a larger amount to ensure that maximum diversification takes place and your returns are optimised towards double digit returns
- Reinvest the monthly loan repayments you get so your investments are optimised and you can enjoy compounded returns that are over and above your principal investment.
3. Advantages of Peer to Peer Lending
In addition to being highly popular, peer-to-peer lending provides multiple benefits over traditional investment instruments like fixed deposits and mutual funds. Let us look at the P2P lending advantages in detail.
3.1 Higher Returns to Investors
LenDenClub helps you build your portfolio by diversifying your investment and giving you considerably higher returns. While a savings account can earn an interest of up to 4% p.a. and FDs provide interest around 6% p.a., the returns with P2P investments can go up to 12% p.a. The annual inflation rate in India is close to 5-6%. This means that even FD investments only cover inflation whereas, P2P investments can help you beat it with a comfortable margin. It provides a marketplace for investors who are looking for lucrative returns and borrowers looking for financial help.
3.2 Quick and Hassle-free Investment
LenDenClub provides an easy, quick, and hassle-free investment interface. You can simply register on the P2P lending platform and find valuable investment opportunities. It makes life easy for the investors as their efforts are reduced considerably. As of date, LenDenClub serves around 1.5 million investors on its online platform.
3.3 Minimal Documentation and Short Period
With online peer-to-peer lending, the turnaround time for you to start your investments is negligible. If you choose the option to auto-invest your funds, the AI-powered interface of LenDenClub doesn’t let your money sit idle. By reinvesting the funds, you can earn higher returns. Minimum documentation requirements play a key role in expediting the process of P2P lending. It is a completely digital process that eases investments and customises the experience for an individual according to their preference.
3.4 Average Your Interest Cost with Multiple Lenders
As per the RBI guidelines, the maximum loan a borrower can take from a lender is capped at Rs. 50,000. While the prescribed amount is higher, LenDenClub allows you to invest a maximum of Rs, 2,000 in a single investment. By diversifying your investment portfolio, you can reduce your risk and earn interest from multiple sources. Hence, you get to earn an average interest that is risk adjusted and beats inflation, still higher than most asset classes.
3.5 Additional Benefits of Choosing LenDenClub
LenDenClub is an RBI registered NBFC P2P that started operations in 2016. It has an investor base of 1.5 million and is widely trusted as the best P2P platform in India. Along with this, it provides an additional layer of safety for your funds by managing transactions through an Escrow Account.
4. Online P2P Lending Platforms
4.1 Requirements to Register as an NBFC P2P
To operate as a P2P lending platform, you need to register yourself as an NBFC P2P and obtain an RBI-approved license. Let us walk you through the requirements to register as an NBFC P2P.
- The company should be incorporated in India
- The company should have adequate technical, entrepreneurial, and managerial resources.
- The company should have an adequate capital structure and sound management.
- The company needs to submit a business plan for conducting a P2P lending business.
- The company can then complete the registration process and obtain a Certificate of Registration.
- The company must comply with any other conditions issued by the RBI.
4.2 Functions of Online P2P Lending Platforms
- These platforms list the loans of the lenders/investors and facilitate financing transactions between the lender and the borrower.
- Online P2P lending platforms help conduct background checks on different levels and help determine the creditworthiness for repayment to the loans to lenders.
- These platforms constantly conduct a risk assessment of borrowers and update it on the website.
- Online lending platforms also provide loan recovery support to lenders in the case of a default.
- P2P lending platforms also have a collection process in place to help provide recovery support.
4.3 Who can become an Investor on P2P Lending Platforms?
Learn how to make money using peer-to-peer lending
- Individuals: Any individual looking to invest funds can invest in a P2P lending platform to earn higher returns. Both high net-worth individuals and even NRI investors can invest in P2P lending platforms.
- Institutional Investors: P2P lending for institutional investors allows non-banking non-financial institutions to invest on P2P lending platforms.
4.4 Why Choose LenDenClub P2P Lending Platform?
- Earn in Double Digits: With the LenDenClub P2P lending platform, you can earn an annual return in double digits. Reinvestment of monthly loan repayments and diversification among borrowers helps optimise investments for higher returns.
- Largest Peer-to-peer Lending Platform: LenDenClub is the largest P2P lending platform present in India and is trusted by millions of people. Within 6 years of operations, the company has grown its investor base to 1.5 million and has one of the lowest NPAs in the industry.
- Strong Credit Modeling: By verifying each borrower on 200 data points, LenDenClub makes a thorough assessment of the risk profiles and repayment capacity of each borrower.
- RBI Registered NBFC-P2P: LenDenClub an NBFC-P2P is registered with RBI and is properly licensed to conduct P2P lending business. It functions under the organisation’s regulations and drives transactions through an escrow account
- Trustee to Your Funds: LenDenClub doesn’t make or receive payments on its own. Rather it uses an Escrow account to carry on all the transactions. In this way, unlike a bank, it acts as a trustee of your funds.
- Accessible Across Platforms: You can access LenDenClub through its website or the mobile apps available on android and iOS. It is completely digital, provides the convenience of making investments and managing your portfolio on the go!
- Low Default Rates: With an NPA rate of 3.98% as of Q2-FY22, it is one of the best destinations to invest your money. LenDenClub has a strong credit policy and collections mechanism in place to minimise default risk and maximise returns gained for investors.
- Maximum Diversification: You can diversify your risk using a LenDenClub online lending platform by lending to multiple borrowers. With a maximum investment limit of Rs.2000 per borrower, you can easily diversify your investments. This spreads out risk and reduces impact of default, if any.
- Auto Investment Technology: LenDenClub’s auto investment technology matches you with suitable borrowers based on your profile and automatically lends money to them. With this technology, you don’t have to go through the hassle of looking for borrowers. Additionally, you can add filters to the kind of borrowers you’d like to invest in and customise investments accordingly.
Online peer-to-peer lending is set to revolutionize the process of lending by providing a marketplace for investors and borrowers without traditional banks making the most of it. While there are many online P2P lending platforms, LenDenClub is the largest NBFC-P2P platform to invest in being RBI approved and operating through an Escrow account making your investments safe. With LenDenClub, you can expect annual returns up to 12%. Register Now!