Traditionally, several small family businesses in India have kept limited or no paper trail of financial transactions. This is mainly because India has a history of a cash driven economy. Likewise, the use of credit cards or other financial instruments by most Indians is quite low compared to other developed countries of the world. These factors often impact the ability of Indians to consistently have a fair credit score.
This means that for these businesses and individuals, access to organized credit from traditional sources such as banks and non-bank financial companies (NBFCs) is either non-existent or extremely expensive. Thus, a large portion of the Indian population is forced to rely on unorganized sectors such as local pawnbrokers who charge exorbitant interest rates and often follow exploitative practices. Here’s where peer-to-peer or P2P lending options can help.
1. Who does P2P lending help?
P2P lending uses technology to directly connect individuals willing to lend their surplus to businesses and individuals in need of cheap and fast loans. It tries to bridge that credit gap by providing access to fast, low-cost financing to meet your personal or business needs.
P2P loans can be a boon for you, especially if you are:
- New credit or have limited financial records
- Medium or small business owner
- female borrower
2. How can P2P lending help borrowers?
There are several reasons why P2P loans can help you get credit when you need it most and on terms that work for you.
- Unsecured loan products: If you are already reeling from a mortgage or other financial pressures, it may not be possible to provide collateral to take out a loan. P2P loans offer collateral-free loans that could help you manage your cash without putting a strain on your assets.
- Credit scoring enabled by Analytics: The credit scoring algorithm uses new-age data points evaluated on over 120 parameters. Thus, it is more efficient with greater accuracy, so even those with limited financial and credit histories have a fair chance of getting a risk assessment.
- Low cost loans: As borrowers and lenders interact directly with each other, monthly installments (EMI) received go directly to the lender and the P2P platform retains no margin. Technology-driven operations reduce the cost of underwriting and other platform overhead, resulting in lower-than-market processing fees. These factors reduce the cost of the loan for the borrower.
- Convenient and fast loans: When you need a quick loan, P2P lending is a good option. P2P platforms have transparent online processes that ensure faster turnaround time. Even during the pandemic-induced lockdown, when bank visits were not possible, online and contactless P2P lending operations ensured continued access to credit for those who needed it.
- Customized products to meet your specific needs: Using new era analytics and data points such as borrower digital footprints, P2P Lending has been able to create customized products that cater to various professions, gender, demographics, and more.
So whether you need a personal loan for your wedding expenses or to deal with a lack of working capital in your business, P2P loans could be the solution.
- Greater ability to take risks: If you are one of those borrowers, who could be considered high-risk, the chances of you obtaining credit from traditional financial institutions are negligible. However, free from banking heritage, driven by young entrepreneurs and lenders with a greater appetite for risk, P2P lending might be an option for you.
3. Are P2P loans for creditworthy borrowers?
While it is true that P2P lending platforms attract borrowers who cannot access credit from banks and other financial institutions, it also helps quality borrowers.
Bank lending is not inclusive, high cost and driven by fears of rising non-performing assets (NPA). The rise of alternative financial models like P2P lending can help you get a better deal.
So, if you are a creditworthy borrower courted by banks and FIs, evaluate P2P loans before finalizing which option to choose. Fast and low-cost loan offers from P2P lending platforms have charmed creditworthy borrowers away from traditional sources, more so lately.
Today, alternative lending models like P2P lending give you a much more efficient and effective way to access credit quickly and cheaply.
This is due to various factors. These include:
- Increase in fintech adoption rate in India.
- A much younger population, sporting a smartphone and comfortable with online transactions
- Borrowers are more willing to shop outside of banks and other traditional financial institutions for convenience and access to low-cost loan products.
- Liquidity crisis and credit crunch, which created greater acceptance of digital lending and borrowing.
- Need for contactless financial service providers, especially after Covid-19.
- Improved access to high quality data from multiple credible sources.