In a credit hungry world, access to getting credit from big financial institutions is very difficult due to the ever rising defaults affecting profits. And even if your loan is approved after lot of efforts, worry does not end here. Because finally getting money is what consumers expect but it is time consuming. And that’s where peer to peer lending companies gain an upper edge. They nullify the involvement of banks.
“Simple borrowing is the motto of every peer to peer lending company”.
Advantages for lender: They earn more interest, which means higher returns, compared to savings account or other investment products.
Benefits to borrower: Take a loan at low interest and pay loans/credit with any bank with higher interest. Chances of getting loan are higher as P2PL does not solely rely on CIBIL score. Check out how to get personal loan when your CIBIL rating is low.
PTPL vs Banks
Here are the comparison or key differences between peer to peer lenders and traditional financial institutions:
|Features||Peer to Peer Lending (PTPL) Companies||Financial Institutions|
|Who is the lender||Individuals/Companies||Banks|
|Loan amount||Small compared to banks||Higher loan can be disbursed depending on the applicant's status|
|Interest rate||Varies but low compared to banks||Varies but high compared to PTPL|
|Is interest rate fixed?||No. It is decided between lender and borrower||Fixed as decided by bank|
|Is EMI fixed?||No. Decided between lender and borrower||Fixed as decided by bank|
|Loan approval process||Fast||Fast but not with all the banks|
|Loan amount transfer speed||Within 3 days||Takes minimum 1 week|
|Charges involved||Listing, processing, late payment etc. but less compared to banks||Various charges such as processing, prepayment, preclosure etc.|
|Late payment charges||Yes||Yes|
|EMI payment options||Auto-debit is mandatory by most. But varies with each lender||Multiple options - direct debit, cash, cheque etc.|
|Loan evaluation process||Personal, Professional, Social and online spending behavior is checked||Same as PTPL but social and online spending behavior is not assessed|
|Data security||Highly secured and not shared or used for any other purpose||Highly secured. But banks can use data to offer other products.|
|Credit risk assessment||Done. But not by every lender.||Done by all banks|
|Credit bureau data sharing||Shared but not by every lender||Done by all banks|
|Documentation process||Very simple||Tedious|
|Document upload option on website||Yes||No|
|Recommended to||Poor income, low CIBIL score, no credit history, small loan amount||Everyone|
|Loan rejection chances||Low||High|
|Collateral Needed||No||No. But it is required, when taken against FD or LIC policy.|
|Is loan guaranteed?||Higher chances compared to banks||Depends majorly on credit history|
|Regulated by RBI||No||Yes|
|Any free services offered?||Few lenders offer free credit report||No|
|Cancellation charges||Varies but there is no charge if cancelled within 24 hours||Yes|
|Loan amount transfer process||Directly to the borrower's bank account||Cheque, demand draft or NEFT|
How it is profitable for lenders to offer loan?
Obvious question that comes to mind is how PTPL companies manage to be profitable even though they charge less interest?
Here are the main reasons why P2PL companies make profit:
No transaction cost: Since the whole process right from application to loan disbursement is online, there is no transaction charge involved. So less manpower and reduced operating cost.
Higher number of applicants: And as mentioned above, the pool of applicants is large, loan amount granted is small, and interest rates offered are on a lower side. So money pooling is at a bigger scale and overall interest earned is high compared to the rates offered on other investment options for e.g. savings account.
Check out more details on getting personal loan from peer to peer lenders.
Basically P2PL’s are risk takers offering credit at low interest rates. So individuals seeking personal loan for small amount or with low income or poor CIBIL score or no credit, can apply for loan at peer to peer lending companies. The chances of getting loan are higher as there are multiple lenders i.e. individual’s or entities. Moreover you can bargain with each lender on the loan amount and interest rate.
And be it India or anywhere in the world, the importance of PTPL is growing at a rapid pace.