Imagine the following scenario. You need money urgently for a medical emergency. What would you do? Every day you receive calls from telemarketers offering personal loans at attractive rates. So, you try one of their numbers and get connected to a specific bank. Then, you apply for a personal loan only to find the same rejected for want of a good CIBIL score.
So, what is the alternative? You can approach a P2P lending platform for assistance. You submit the documents, and they sanction the loan after performing the requisite credibility checks. However, the interest rate is higher than banks. Nevertheless, you do not mind paying the higher interest rate because you got the funds when you needed them the most.
So, let us understand the benefits of a P2P lending platform.
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How would you benefit from a P2P lending platform?
- People with low or unsatisfactory CIBIL scores can apply for loans on the P2P lending platforms. The decision whether to lend or not rests with the lender alone.
- The loans available on the P2P platforms are unsecured. Therefore, the borrower does not furnish any collateral.
- The P2P lending platforms are online. Hence, the process is quick with fewer documentation formalities.
- Borrowers can negotiate with lenders and seek a better interest rate. The platform allows for interaction between the borrowers and the lenders. So, if the lender agrees to the reduced rate, they could clinch the deal. You do not have such options with banks.
Lenders benefit from the P2P platform in many ways.
- It provides them with opportunities to get higher returns on their investment. The banks, mutual funds, and other institutions cannot match the returns generated from P2P lending. However, the lenders have to be wary of the risk factors associated with P2P lending. There could be defaults, and following up on defaulters can be challenging because of the lack of collateral.
- The lender can choose which borrower to finance. The borrower might have the lowest CIBIL score. That should not impede the lender if they decide to finance the borrower.
- Compared to bank lending, P2P lending is easy because of fewer documentation formalities. In addition, these loans are unsecured, and hence there is no collateral available. Therefore, the process becomes easy as there would be no need to create the charge on the security.
Benefits to the P2P lending platform
- P2P platforms are not authorized to accept deposits from the public. So, there is no question of reinvesting their funds and earning returns. The platforms do not have any interest burden.
- The platforms act as a conduit or a facilitator of loans by bringing the borrower and the lender together on a common stage. The borrowers and lenders can decide on the terms and conditions, and the P2P lending platform does not have any role to play. They get their charges for being a facilitator.
- The P2P platforms do not have many overheads because they function online. Therefore, there is no need for investing in infrastructure or even human capital resources.
Borrow Money Without Any Paperwork
How do the P2P platforms differ from chit funds?
Chit funds are similar to P2P platforms, but they differ in some critical respects. Registered chit fund platforms like Money Club function online. They invite members to register themselves with the forum and invest money for a specific term. Accordingly, Money Club searches for a compatible group using its super algorithm. The homogenous group consists of investors ready to invest similar amounts for a comparable period.
The activity results in the formation of a money pool. Each member can bid to receive the amount collected in the pool. The individual ready to make the highest sacrifice gets the bid amount. The balance amount is divided amongst the other members after deducting Money Club’s charges for facilitating the activity. This process continues until all the investors get their share of the pooled money. So, it is a rotary savings-cum-credit instrument that can offer high returns. On average, the Money Club chit fund platform provides around 21% ROI.
The P2P lending concept in its present form is in its initial stages in India. However, it can improve and provide the perfect alternative to banking services.