Personal loans are collateral free loans that help people tide over sudden need for funds. People borrow money for various reasons. To make purchases that they cannot immediately afford such as gadgets or appliances or to invest in their business. They may need quick money for personal expenses like a wedding, medical bills, clearing previous debt, etc.
Sometimes people borrow money from their friends and relatives and sometimes they go to the bank or non-banking financial institutions. If you need a personal loan, here’s what you need to know.
What is a personal loan?
Personal loans, primarily in India, are unsecured loans. In other types of loans – home or auto – a person would be required to keep a form of collateral or security against the loan amount, which can be seized in case of failure in repayment. However, personal loans do not require any collateral or security. The lender cannot seize anything if loan repayment is delayed or not repaid at all. However, the consequence of not repaying the loan for the borrower is that their credit score will plummet.
While collateral based loans can be used only for the purpose they have been taken for such as to buy a home or an automobile, there is no such requirement for personal loans. You can use a personal loan for any purchase or expense. One only has to adhere to the terms mentioned in the loan agreement and make timely repayments.
As these are collateral free, to qualify for a personal loan, an individual needs a good financial and credit history. Many deserving borrowers become ineligible for personal loans when they are evaluated based on traditional “hard rules” of credit evaluation used by banks and other financial institutions. This is where peer-to-peer (P2P) lending comes in.
What is P2P lending?
P2P lending is an alternative to personal loans. It enables people to borrow money from lenders directly without the need of intermediaries like banks. In P2P lending, borrowers and investors are brought together in a digital marketplace where borrowers request money and lenders can fund them as per their risk appetite.
P2P lending eliminates the role of financial intermediaries as the middleman. People don’t have to go to a bank, credit union, or online lenders when they can borrow from businesses directly. But when can you opt for P2P marketplaces? You can do that in cases mentioned below:
- You want quick loan which is convenient and easy to apply for.
- You want to use a loan process with a credit evaluation mechanism beyond the tradition “hard-rule” approach thereby looking at your ability to service the loan in a more comprehensive manner.
- You want a lower rate of interest.
- You are looking for a contactless, online, tech-enabled approach to lending.
How does it work?
P2P lending occurs through websites or online marketplaces where lenders and borrowers directly get in touch. Here, a lender registers and adds the money he is interested in investing to an escrow account, which is then used for lending to the borrowers. Similarly, the borrower registers on the platform and applies for a loan with the required documents. The whole process is online.
After lenders and borrowers have registered on the marketplace, the platforms assess the risk and evaluate the borrowers along with vetting the lenders as well. Platforms also have to facilitate the loan listing, funding, and disbursem*nt, along with the legal agreement binding lender and borrower. They further facilitate the transactions between lenders and borrowers through an escrow account. Here the P2P platform is the third party that looks after the bond, deed and documentation. They do all the work, from collecting repayments to recovering loans.
How to Get a Loan from a P2P Platform?
There are several peer-to-peer lending platforms in India, and you don’t have to settle for the first platform you come across. Here’s what you need to look out for when you are evaluating potential lenders:
- Understand the platform’s process and eligibility criteria. A good platform will display this information transparently on the platform.
- Evaluate the size of the platform. A platform with a huge base of lenders means more options for you. After All it’s the lenders who will fund your demand.
- Every platform charges a loan processing fee. The amount differs for every platform. Choose the one that suits you best.
- Like all other aspects, the terms of repayment also vary from platform to platform. You can choose the platform which is in line with your requirements. For example, some platforms charge a loan prepayment fee, while others allow it at no additional cost.
- You should ensure that you don’t just match their eligibility criteria but that your credit and financial profile is attractive to the lenders. This is an open marketplace, and the more creditworthy borrower will always be in high demand and will get faster funding by the lenders.
After you finalize a marketplace, the P2P platform will provide you with credit for the interest rate, fees, and repayment terms.
How Does The Loan Disbursal Take Place Via P2P Lending?
In the traditional setup, loan disbursem*nt takes time with all the paperwork and verifications, including checks based on an individual’s creditworthiness, the authenticity of documents, etc. However, in the P2P setting, time is greatly reduced.
Since the whole process is automated and technology-based the time taken from application to disbursal is projected to be lower. It primarily depends on your credit worth and the amount you need to borrow as creditworthy borrowers attract lender interest and hence funding faster.
You as a consumer can benefit from higher returns from lenders and lower interest rates for borrowers as these platforms have lower overhead costs and do not make margin from the monthly instalments or repayments received from the borrower. Instead, they charge a fixed fee for the services.
Who Does P2P Lending Help?
P2P lending uses technology to directly connect individuals willing to lend their surplus with businesses and individuals in need of cheap and fast loans. It is trying to bridge this credit gap by offering access to low-cost and quick finance to meet your personal or business needs.
P2P lending can be a boon for you, especially if you are:
- New to credit or have limited financial records
- Medium or small business owner
- Women borrower
How Can P2P Lending Help Borrowers?
There are multiple reasons why P2P lending can help you get credit when you need it the most and at terms that suit you.
- Unsecured loan products:If you are already reeling under mortgage or other financial pressures, providing collateral to take a loan may not be feasible. P2P lending offers collateral free loans that could help you manage your liquidity without putting strain on your assets.
- Analytics enabled credit assessment:The credit evaluation algorithm uses new-age data points evaluated across more than 120 parameters. Thus, it’s more efficient with higher accuracy such that even those with limited credit and financial history get a just chance to get risk assessed.
- Low-cost loans:As borrowers and lenders directly interact with each other, the monthly instalments (EMIs) received goes directly to the lender and the P2P platform does not keep any margins. Technology driven operations reduce the cost of under-writing and other overheads for the platform, leading to lower-than-market processing fees. These factors reduce the cost of loan for the borrower.
- Convenient and quick loans:When you need a quick loan, P2P lending is a good option. P2P platforms have seamless, online processes that ensure faster turnaround time. Even during pandemic-induced lockdown, when bank visits were not possible, P2P lending’s online, contactless operations ensured continuous access to credit for those in need.
- Customized products to cater to your specific needs:By using analytics and new-age data points such as digital footprints of borrowers, P2P lending has been able to create customized products that cater to various occupations, gender, demographics etc.
So, whether you need a personal loan for your wedding expenses or to meet working capital shortage in your business, P2P lending could be the solution. - Higher ability to take risk:If you are one of those borrowers, who could be considered a high risk, chances of you getting credit from traditional financial institutions is negligible. However, free from banking legacy, driven by young entrepreneurs and lenders with bigger risk appetite, P2P lending could be an option for you.
Bottom Line
Although, P2P platforms ensure that the customer experience remains as seamless as possible with hassle-free procedures, taking a personal loan is a huge financial commitment. You have to ensure that you pay the fixed amount on time every month. So before you take out a personal loan, make sure that you have a good reason to do so and service it well to improve your credit score.
