P2P lending is different from bank lending. You have two parties in the bank. One is the bank, and the other is the borrower. In contrast, the P2P platform has three parties. Besides the lender and the borrower, there is the P2P platform that facilitates the transaction. The P2P platform works on crowdfunding to finance borrowers interested in taking unsecured loans.
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How do the P2P platforms check the borrower’s credentials?
Whenever you access a P2P platform for loans, it asks you to furnish your ID proof, PAN card, address proof, bank statements, and income details. Are these not the documents that banks ask for from potential borrowers? Yes, they are the same. So, how are the P2P platforms different?
Contrary to what many people think, P2P platforms verify the borrower’s residence and workplace before processing the application. However, they have outsourced these services to third parties. Generally, the verifications take place within 24 hours in big cities. However, if the borrower lives in a remote location, it can take up to 48 hours for the verification to be complete.
Rajat Gandhi, CEO of Faircent, states that the company invariably confirms the borrower’s residence and workplace before making them live on the platform.
Salaried people must furnish their IT returns, salary slips, and Form 16 as income proof. On the other hand, self-employed people have to submit their bank statements and IT returns (minimum of three years) to be eligible for P2P loans. Secondly, the income eligibility of self-employed people is higher than salaried people because of the variable nature of income for the self-employed.
Social Media Interactions
Some P2P platforms use AI and ML to track the social media footprints of their borrowers to determine their creditworthiness. It enables them to determine whether the applicant is regularly applying for credit facilities, making them a high-risk borrower.
P2P companies used data analytics and social modeling to determine borrowers’ profiles. They also look at alternative avenues like repayment records, cash flow, and personal details.
Banks are members of CIBIL, whereas P2P lending platforms are not. However, the platform can ask the borrower to furnish their latest CIBIL report by applying for the same from CIBIL.
Usually, banks do not entertain borrowers with CIBIL scores less than 700, whereas it is not so with P2P platforms. They have a different risk classification procedure that categorizes the borrower into four classes: a) very low risk, b) low risk, c) high risk, and d) very high risk.
P2P platforms decide the interest rate spread based on the risk classification. The highest interest rates are for the very high-risk category, and the lowest rates are for the very low-risk category. In contrast, banks usually do not entertain borrowers in the high and very high-risk categories.
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No Blacklists in P2P lending
Usually, banks have a list of sectors they do not lend to. There are no such restrictions with P2P lending because there are no blacklisted industrial sectors. However, does that mean every applicant gets a loan through the P2P platform? No, it does not work that way.
P2P companies take a more humane approach and a personal touch when processing loans. They look at all borrowers as different individuals and try to offer customized loans to suit their requirements.
Faircent says that the loan sanctioning ratio of their company is 5%. The company has a unique algorithm that assesses the credit requirements while showing flexibility with the financial parameters.
What about chit funds?
Chit funds are excellent avenues for raising urgent money. Any individual can become a member of a registered chit fund platform like Money Club. However, Money Club conducts a thorough background check on the individual before accepting them as members. It allows them to filter out bad borrowers and concentrate on genuine applicants. We have discussed various aspects in this article. Money Club looks at all these aspects before allowing the participants to bid for the pool.
Many people feel that P2P lenders are more concerned with the higher interest rates and so offer loan facilities to any Tom, Dick, and Harry. However, it is not so because they rely on an effective algorithm that uses data analysis, AI, and ML to verify the borrower’s credentials before taking them live on the platform.