A lot has been written about Peer to Peer lending (P2P lending) off late and the Central Bank (RBI) is seriously looking at this sector. We can see it passing a regulation sooner rather than later.
P2P loans are unsecured personal or business loans made with the help of a third-party intermediary (P2P Lending platform).
Borrowers, who might need money to pay off a credit card or for marriage, complete an online application and submit their KYC and credit documents; which in-turn help determine their creditworthiness. This creditworthiness determines the interest rate of any potential loan. (The interest rates offered are generally lower than those of credit cards.) The P2P companies then match the borrowers with lenders willing to risk funding the loan.
Some would question (especially the potential lenders) the risks involved with P2P lending; but if one takes calculated risks there are high potential returns on offer.
Also no one is recommending this asset class to be the sole investment of yours; this should be only a part of your investment portfolio.
Some of the factors that need to be considered while investing in P2P lending are:
1. It’s a Risky Asset Class: please remember like stocks there are risks associated to this asset class. If you are looking for a higher rate of return then you would invest in a borrower with relatively lower credit rating and vice versa. The best part is you get to choose your return and also the borrower.
2. Diligence: Please note that though conducting diligence is part of lenders responsibility; a platform like ours, reject 90% of the borrowers that register on the platform. Hence creditworthiness of the borrower is also done by the platform itself.
3. Spread risk: This is one thing that has to be done by investors like one does through Mutual Funds. The investor has to make sure that the total quantum of investment, via P2P lending, should be spread across borrowers and the entire amount should not be allocated to one profile. This ensures that the risk is simply diversified and hence probability of default significantly lowers.
4. Less volatile: Unlike a stick market there is no volatility in P2P lending with returns starting to accrue on a monthly basis; hence from the next month (of your investment) one starts getting the principal component back.
5. No Minimum ticket size: Unlike the structured products like PMS etc. there are no minimum investment thresholds that have to be met while investing with P2P lending
Considering above this asset class should definitely be part of one’s investment strategy – with moderate risks there are huge upsides involved in this product.