Investing in people: P2P lending

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In the previous chapter we took a good look at angel investing from the angle of an investor. In this one, however, we’re going to see another form of financing that’s been getting a lot of traction in recent years - P2P lending. Any guesses on what P2P lending might be? You’re probably thinking of some new-gen, high-end form of lending, right? On the contrary, the concept of P2P lending has long been in existence ever since man invented the concept of currency. And we just happened to give a fancy name to this type of financing.

Your parents or your grandparents would have probably used the P2P method to lend or borrow for their needs at some point in their lives. Ask them if they have ever lent money to their friends or colleagues for a certain period of time and charged a nominal interest for their efforts. If the answer comes back a yes, then they’ve been involved in P2P lending.

So, what exactly is P2P lending?

P2P stands for Peer-to-Peer. And as you’ve probably already guessed by now, P2P lending is basically one individual lending their money to another, for a specific period of time at an agreed upon rate of interest. It is also referred to as crowd lending or social lending, and it is quickly becoming quite popular among millennials since they’re more open to investing in people.

How has P2P finance evolved over the years?

Unlike the days when your parents or your grandparents were involving themselves in peer to peer lending, the market has transformed quite extensively. Back then, the interest payments and repayments had to be made in person. And due to the high amounts of risk, they would only lend to people they knew personally.

However, that’s not the case now. There are several online P2P lending platforms that help individuals provide P2P loans to others. And the best part about all of this is that every step of P2P lending can be done online, without ever leaving the comfort of your own home. Even the interest payments get credited to your bank account electronically.

How do you get started with P2P lending?

As you’ve seen already, the first step to getting yourself into the world of P2P loans is to get yourself registered with any one of the online P2P lending platforms. Once you’re registered, you will have to specify your investment profile, which involves disclosing your risk tolerance levels. And based on your investment profile, the platform will display loan listings for you to choose from, allowing you to pick and choose the borrowers that you’re comfortable with lending to.

Once you’ve finalized a borrower, you will be required to sign a formal contract, which adds a bit of safety to your investment. As a P2P lender, you can choose to lend either a portion of the loan requirement of the borrower, or the entire amount. And the rate of interest on loans is dependent on the borrower’s credit profile and other financial information. For instance, if a borrower’s credit rating is low, they’re categorized as risky and as a result, the interest rate that you get to charge also goes up. Low-risk borrowers, on the other hand, are charged a lower rate of interest.

 

Things that you need to keep in mind when investing in people through P2P lending platforms

While all of this may seem exciting and lucrative, there are certain key things that you need to consider and keep in mind.

  • P2P lending can be very risky

Since you’re effectively lending to individuals who you’re not acquainted with, the risk of default tends to be much higher than usual. Therefore, before getting involved in peer to peer lending, ensure that you do your due diligence. Start by looking through the rate of default for each P2P lending site. The lower the default rate, the better.

  • Be aware of fees and commissions

Before you start lending on a P2P platform, make sure to check the fees and other charges that they levy. Some platforms only charge a small fee, while on others, the charges may be exorbitant.

Wrapping up

Well, that’s about it for this chapter. It was quite enlightening, wasn’t it? With this chapter, Module 2 has finally come to a close. In the forthcoming module, we’re going to be looking at how technology has transformed investing today. So, stay tuned!

A quick recap

  • P2P stands for Peer-to-Peer. It is basically one individual lending their money to another, for a specific period of time at an agreed upon rate of interest. 
  • The first step to getting yourself into the world of P2P loans is to get yourself registered with any one of the online P2P lending platforms. 
  • Before you invest in people, though, keep in mind that P2P lending can be very risky.
  • Also, make sure to check the fees and other charges that they levy. Some platforms only charge a small fee, while on others, the charges may be exorbitant.

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FAQ'S

The interest rates for P2P lending vary from one platform to another. Typically, they range from around 10.99% per annum to 36% per annum.
Before you invest via a P2P lending platform, ensure that you look at things like the credibility of the lending platform, the credit score/history of the borrower, and the processing/other charges, if any.
As a P2P lender, you can invest/lend any amount that is convenient for you - even if it is as low as Rs. 5,000. You can also earn a higher rate of return on P2P platforms than on many other investments. However, do keep in mind that the higher the returns offered, the greater the risk too.
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