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  • Personal Loan BYTES FROM OUR KITCHEN

    Peer to Peer Lending

    Ever since its inception, Peer-To-Peer lending or P2P lending has created a stir amongst the borrowers due to the easy loan procurement facility that it offers. Also known as crowd lending or social lending, this method allows people to borrow money without the involvement of any bank or financial organisation. As the name suggests, this flexible mode of person to person debt financing removes the need for any brick-and-mortar banking establishment and makes the borrowing process much easier. This crowd funding method made credit approval possible for those borrowers who are otherwise unable to avail it through conventional financial institutions. Whenever you think about taking any loan or credit, the first word that usually pops up in your mind is a bank. But, peer-to-peer is a new concept that has brought significant changes in this perception of the borrowers. Even though banks are till now the most trustworthy medium of borrowing, P2P lending has received a high amount of popularity and acceptance among people who either don’t have easy access to banks or don’t want to go through the complex process of loan application and approval. The peer-to-peer online platforms serve as alternatives for all those individuals who want to avail instant personal loans without undergoing a complex documentation process.

    What is Peer-To-Peer Lending?

    Peer-to-peer lending is a form of crowdfunding which is used to raise money for people who don’t want to borrow funds through traditional lending organisations. This informal lending process discards lengthy formalities which are typical of banks and offers loans with minimal documentation. It generates returns for those who want to borrow as well as for those who want to invest.

    P2P lending system is solely based on the Peer-to-Peer lending sites which are designed for the wellbeing of people and to work for their benefits. Managed and operated by groups of freeformers, these websites allow people to lend and borrow money from each other directly. The main motto of these sites is to eliminate the need for intermediaries and connect the borrowers directly with a number of lenders on one single platform. These websites also offer loans at a much lower rate for those who require it even at a higher risk. The P2P lending sites earn revenue in the form of fees charged from both the lender and the borrower registered on the websites.

    Peer-To-Peer Lending Features

    The special features which make the peer-to-peer lending system stand out from the hoard of other informal lending options are listed out summarised here:

    • P2P lending system raises loans for individuals who don’t have access to traditional banking systems from persons who want to invest their money.
    • By eliminating the need for a banking system or a financial intermediary in the borrowing and lending process, it extends credit to individuals who can’t avail it through financial organisations.
    • The main principle of this system is to offer benefits to the borrowers as well as the investors. While it facilitates people to borrow funds in low-interest rates, it also enables savers to get good interest on their saved amount.
    • The entire process is conducted through online platforms where both the lenders and the borrowers register themselves and directly get connected with each other. Only after doing a proper assessment, the members are allowed to participate in the transactions.
    • Each and every peer-to-peer lending platform is considered as non-banking financial organisation controlled by the Reserve Bank of India.

    How to Get Loan through Peer-to-Peer Lending System?

    The process of getting a loan through the peer-to-peer lending websites is very simple and easy. Whether you are a new entrant in the P2P lending method or have previous experience in borrowing through these sites, follow the given steps to get loans through a peer-to-peer lending system:

    • Go through the reliable P2P sites which provides services in your area and then sign up for it to become a member.
    • The website that you have signed up with will serve as an intermediary and conduct all the formalities on your behalf. It will connect you with the prospective lender who is willing to lend you the necessary amount of fund.
    • Before getting the fund from the lender, you have to go through numerous checks on your background, personal details, employment status and credit history. The quality check will be quite stringent as a loan is provided only to the credible borrowers to minimise the risks.
    • Since the bidders and lenders will be checking all the information that you have posted on the website, give all correct information about yourself including your personal details, financial background, reasons for taking a loan etc. You can even provide your photo or a poem to draw interest of the viewers.
    • After you get the approval, you will be provided with a number of options to choose from. The lender will assign you with some risk categories under which you can decide to borrow the required fund.
    • Apart from auctioning for loans, as a lender you can spread your funds among multiple borrowers. For doing that you need to decide the risk categories for lending. But, while deciding the categories remember that loans with greater risks will give you higher returns. You can also auction your loan to members who have limited funds to lend.
    • For receiving desired bids on your loan, you can fix an interest rate or premier price for the loan and receive the bids. If the loan is entirely funded for, the lenders might even bid more than the fixed interest rate that they charge for getting the right of funding your undertakings.

    What are the Benefits of P2P Lending?

    Personal loans most of the times come up with a lot of tension and lead to an unsure financial future. The lengthy loan application and approval process make it even more tedious for the borrowers. P2P lending sites, on the other hand, make it as simple as a cakewalk. If done in a correct way, P2P lending can be highly beneficial for you and take your financial portfolio to a new level. Some of the vital advantages that you might expect from this system of lending are as follows:

    • Compared to the rates offered by a bank or other financial organizations, P2P borrowers can enjoy lucrative cost advantages.
    • The process of getting a loan from P2P lenders is very fast and hassle-free. All you need to do is to register on the website and you will instantly get connected with the lenders as well as the borrowers present on the site.
    • Being highly tech-savvy, these sites render services at a very short period of time with minimal documentation. It cuts down the hefty documentation process carried out by typical banks and makes borrowing easy.
    • These P2P financial forums are dedicated towards helping people and work for the betterment of people. Since they have an essence of community service, it is easy to exchange information and most of the users are very happy with the way how these sites work.
    • When compared to the loan application formalities mandated by the banks and other formal lending organisations, the peer-to-peer lending system is more focussed and convenient.

    How is the Interest Rate Calculated in Peer-to-Peer loan?

    The interest rate in peer-to peer-loan is mainly calculated on the basis of Monthly reducing balance. In this system, the borrower has to pay interest only on the remaining loan balance and not on the entire principal amount.

    Example-

    Suppose, you have taken a loan of Rs.5 lakh with an interest rate of 15% p.a. for a period of 5 years. When you pay the first month’s EMI, consisting both the principal amount and the interest, a part of your principal amount will also get paid along with it. As a result, with every EMI payment, some amount of the principal amount will get paid off and your EMI will automatically keep on reducing every month. This means, after the first month’s payment, you have to pay the EMI only on the remaining principal amount of the loan and not on the actual principal amount of Rs.5,00000.

    Eligibility Criteria for the Peer-Peer Loan Borrowers

    Even though the P2P portals are open to anybody who is in need of money, these mainly attract people of low-income groups or with low CIBIL score who have no other alternative to get loans. If though anybody can ask for a personal loan through the peer-to-peer lending websites, the final decision is taken by the lender, which can either be an individual or an institution.

    How does the P2P Lending System Work?

    Individuals who want to borrow or lend through the P2P lending system, need to register themselves with the website first. Whether an individual is registering as a lender or as a borrower, he or she has to enter all their personal as well as professional details in the particular lending website. While signing up as a borrower, you need to enter your name, address, pan card, six month’s bank statement, and salary slip(if job holder).

    The provided details will be safe while it is transmitted and the confidential information will be kept protected. Based on the borrower’s provided details, the admin of the website will put you in a certain category. Next, it’s up to the lender to take the final call based on the credibility and loan repayment ability of the borrower.

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    What are the Advantages of P2P Lending over Banks?

    Even though banks are considered to be the most trustworthy medium of lending, the peer-to-peer lending system has changed the scenario to a great extent. It has a number of perks that make it an advantageous option compared to the traditional banking system. Under this section you will get to know the advantages of peer-to-peer lending over banks:

    • Traditional financial institutions and bank do not provide loans to borrowers with a poor CIBIL score and low monthly income. But in the peer-to-peer lending system, it is entirely up to the lender whom he wants to give loan and whom not.
    • Through this platform, people with a very poor CIBIL score and low income can get personal loans from multiple lenders at low interest rates and flexible terms. Since the borrowers can directly negotiate with the lenders, sometimes they get loans at a lesser rate than the banks.
    • This system doesn’t require hard-core documentation process. With minimal documents, the borrower can avail loans from the lenders available on the website. The lending and borrowing process is based on the mutual understanding between the borrowers and the lenders.
    • Compared to banks, P2P lending has an upper-edge when it comes to the pace and ease of the process. The processing time is fast and the borrowers needn’t wait for a long time for the loan to get approved and disbursed like the traditional banks.

    Key Points to Check as a Borrower

    As a borrower, you might find it very easy and convenient to apply and get instant loan approval through this lending system. But, since the entire process is done online you must use due diligence while participating in the borrowing activities. Following are some of the vital points to keep in mind before going for a peer-to-peer loan:

    • Since P2P loans are offered through online portals, it is pivotal to verify the authenticity and the reliability of the website before participating in the transactions. Check the reviews and ratings of the website as well as the lenders and then take the decision.
    • As you will be sharing very important personal as well as professional information on the website, confirm that its Symantec SSL certified to ensure the safety of your information.
    • While borrowing loan through P2P sites, don’t take a hasty decision. Visit several websites, spend some time on each to understand how they work and then choose one which you think will provide the maximum benefits.
    • Never hesitate to bargain with the lender to get the lowest interest rate while borrowing the loan. Cite the lender your credibility as a borrower and ask for low interest rates on the loan.
    • Don’t just focus on the monthly EMIs that are to be paid. Along with EMIs, you must check the loan tenure, processing fee if any and the total extra amount that you need to pay apart from the principal amount.
    • Before finalising a deal with the lender, be vigilant and read all the loan-related terms and conditions of the lender. Carefully go through the document to check if there is any hidden cost involved before agreeing to the terms.

    Is P2P Lending a Safe Medium of Taking Loan?

    The P2P lending system is working as a flexible financial window for people who are not eligible for getting a loan from the banks and other financial institutions. However, just like any other lending method, this system has its own drawbacks. In recent times, people have shown their concerns about the authenticity of the websites and risk factor associated with the lending and borrowing activities that are conducted through the P2P platforms.

    The fact is, while there are many P2P lending platforms who work relentlessly for the financial well-being of the people across India, there are some websites which practise illegal means as well. It is completely at the user’s discretion to check the authenticity of the websites and lenders before entering into any transaction with them. If you perform the activities with due diligence and prudence, P2P lending is undoubtedly a very safe and convenient medium of borrowing loan at the time of urgency when all other options are not accessible for you.

    P2P lending is garnering high popularity among the users with every passing day. It is a saviour for the underprivileged and under-banked sections of the society who are either not considered eligible for loans or don’t have easy access to the banks. Most of the users are very happy with their dealings with the P2P lending platforms. If used prudently, this flexible and easily accessible lending system can change the graph of your future financial portfolio.

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