Traditionally, several small family businesses in India have maintained little or no written records of financial transactions. This is mainly because India has a history of being a money driven economy. Likewise, the use of credit cards or other financial instruments by most Indians is quite low compared to other developed countries in the world. These factors often have an impact on the ability of Indians to always 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 corporations (NBFCs) is either non-existent or extremely expensive. Thus, a large part of the Indian population is forced to rely on unorganized sectors such as local pawn shops 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 the P2P loan help?
P2P lending uses technology to directly connect individuals wishing to lend their surplus with businesses and individuals in need of cheap and fast loans. It tries to fill this credit gap by providing access to quick and low cost finance to meet your personal or professional needs.
The P2P loan can be a boon for you, especially if you are:
- New to credit or have limited financial records
- Small or medium business owner
- Female borrower
2. How can P2P loans help borrowers?
P2P loans can help you get credit when you need it most and on terms that work for you for several reasons.
- Unsecured loan products: If you are already under a mortgage or other financial pressure, it may not be possible to provide security to take out a loan. P2P loans offer unsecured loans that could help you manage your cash flow without straining your assets.
- Credit score activated by analysis: The credit scoring algorithm uses new-age data points evaluated on more than 120 parameters. Thus, it is more efficient with greater accuracy, so that even those with limited credit and financial history have a fair chance of getting a risk assessment.
- Low cost loans: As borrowers and lenders directly interact with each other, the monthly payments (MIEs) received go directly to the lender and the P2P platform does not keep any margin. Technology-driven operations reduce the cost of subscription and other overhead costs for the platform, resulting in lower processing costs than the market. These factors reduce the cost of the loan for the borrower.
- Convenient and quick loans: When you need a quick loan, P2P loan is a good option. P2P platforms have transparent online processes that ensure faster turnaround times. Even during the pandemic-induced lockdown, when bank visits were not possible, contactless online P2P lending ensured continued access to credit for those in need.
- Customized products to meet your specific needs: Using new age analytics and data points such as borrowers’ digital fingerprints, P2P loans have been able to create personalized products suitable for various occupations, genders, demographics, etc.
So, whether you need a personal loan for your wedding expenses or to deal with the lack of working capital in your business, the P2P loan could be the solution.
- Greater ability to take risks: If you are one of those borrowers, who could be considered high risk, the chances that you will get credit from traditional financial institutions are negligible. However, freed from the banking legacy, driven by young entrepreneurs and lenders with a greater risk appetite, P2P lending might be an option for you.
3. Is the P2P loan intended for creditworthy borrowers?
While it is true that P2P lending platforms attract borrowers who cannot access credit from banks and other financial institutions, they also help quality borrowers.
Bank loans are non-inclusive, expensive, and driven by fear of an increase in non-performing assets (NPAs). The rise of alternative financial models like P2P loans can help you get a better deal.
So, if you are a creditworthy borrower courted by banks and financial institutions, evaluate P2P loans before finalizing the option to choose. The fast, low-cost loan offerings of P2P lending platforms have charmed creditworthy borrowers away from traditional sources, even more so in recent times.
Today, alternative loan models such as P2P lending offer you a much more effective and efficient way to access credit quickly and at low cost.
This is due to various factors. These include:
- Increased rate of adoption of FinTech in India.
- A much younger population with smart phones comfortable with online transactions
- Borrowers are more willing to buy outside of banks and other traditional financial institutions for convenience and access to low-cost loan products.
- Liquidity crisis and credit crunch, which has 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 several credible sources.