P2p lending platforms are the online platforms that match an applicant borrower with a potential lender.
The borrower could be an individual or a company. The credit is given based on the credit score of the borrower.
The interest rate is also decided upon the credit score. The P2P lending company charges a fee from both borrower and lender for the services. The oldest form of p2p lending in India is known as community chit fund.
It all looks so good so far! But there are some downsides also to p2p lending.
Check out the list of both pros and cons of p2p lending so that you can decide whether it is a suitable way for you to borrow or invest money.
Pros of p2p Lending
Convenient & Quick Application Process
The p2p lending platforms are beneficial for borrowers as the application process is completed online.
So it is processed quickly and without much hassle, unlike the typical offline process to apply for a loan. P2p lending is a great way to get quick cash flow and funds in a limited turnaround time.
Impressive Interest Rates
The interest rates provided by p2p lading platforms to lenders are higher than many other saving schemes.
Thus it becomes the best place to invest your money to get maximum returns. And the interest rates are in favour of the borrower as well.
This is because the interest rates are very high in the market if you only want to get a loan based on your credit score.
Facility to Liquidate Your Funds Early
P2p lending gives you access to your funds at short notice. That means you can liquidate your funds before the loan term without paying any extra charges.
You only need to sell the loan to another interested lender. It generally happens without much difficulty because it’s a win-win deal for both borrower and lender.
You Can Diversify Your Investment
You can take a calculated risk with your investment in p2p lending. It allows you to divide your money amongst various loans.
If you divide a big sum into 5 different loans and 1 person defaults, you can cover it from the other 4. Or at least you can minimize your loss. Instead, if you give the entire money to one borrower and it is not paid back, it’s a total loss.
Cons of p2p Lending
After all the wonderful pros of p2p lending, let’s look at some of its unavoidable cons here!
The Investment is not Covered
The downside of p2p lending is that your investment capital is not covered by the Financial Services Compensation Scheme (FSCS) or the government. That means the money of the lender remains at risk until not paid back in full.
So the platform you choose for p2p lending should have transparent dealing and a policy in place if the borrower turns defaulter.
Higher Interest Rates With Poor Credit Scores
With a poor financial credit rating, it’s difficult to get a loan through p2p lending. Even if you get a credit, the lender provides the loan at considerably higher interest rates.
The penalty and consequences of missing an EMI are also more serious in p2p lending. Your interest rate for another loan increases further.
You Might Need to Wait
As explained earlier, the p2p platforms are like matchmakers in between borrowers and lenders.
So it might take some time to find a suitable borrower for the conditions laid by you if you are a lender. And as a borrower, you might need to wait for a lender ready to give a loan on your credit score.
In a Nutshell
P2p lending is being considered as the future of lending by experts. However, it is pretty clear that apart from many advantages, there are also certain disadvantages of p2p lending.
If you are going for this platform, it’s crucial that you keep the risk in mind, along with the benefits it offers.
Aatish Khanna works with the Content Marketing team at Money Club – a digital chit fund platform that makes saving, borrowing, and investing your money more efficient.
He writes on topics to help his readers understand processes so they can make better financial decisions.
He’s the go-to person that his family, friends, and colleagues turn to for all their money matters. He loves to play board games and aspires to one day build his one finance-related board game and app.