What is Peer to Peer Lending ?
Is it safe ?
Peer to Peer lending is a new age lending platforms. It serves people who are ready to borrow at high interest rates. The reason being they will not be able to secure their loan from banks or by any other means.
As the name suggests you can help a lending hand to your friend who is in need of money. Each one of you would have gone through a time where you had given money to your friend. Even after a year your friend would not have thought of giving it. This is a critical situation and you can address it in just one way. Directly approach him and ask your money.
The sad truth is most of the time, they will not return your calls. Has this happened to you ?
Now in this Peer to Peer lending, you are just going to provide a loan of as small as 500Rs. Borrower can be someone whom you don’t know. He will repay in few weeks or months. The repaying interest rates can be from 14% to as high as 30%.
Why they borrow ?
Banks will not provide loan for vacation. These new age platforms will provide such loans. Further the amount may be as small as 25,000 or 50,000. In these scenarios, P2P platform provide a helping hand and hence higher interest rates.
Loans are provided for,
You can provide any reason to borrow some money and accept that interest rates.
Is it safe ?
In any investment there will be associated risk. Even in this lending the risk is high. Borrowers are classified as per their risk profiles into different categories.
Those with less risk will be provided loan at 15%. Gradually this interest rate will keep increasing. Those with highest risk will be provided loan at around 30%. Credit risk is assigned based on the capacity of the customer, the way he has repaid his loans in his life, any current outstanding etc.
How they collect money ?
If you are borrower, you will be asked to transfer the money into an escrow bank account. From there you will be asked to distribute to the borrowers. Lending amount can be as low as 500. Literally your 1 lakh can be distributed to 200 people.
If there is a risk, you should take steps to reduce the risk. As you are going to distribute smaller amounts, the risk is low. Even if one person is not able to pay, these P2P companies will follow up with them and retrieve the loan amount. You need to wait for 6 to 12 months for this process to get completed.
It is one alternate investment venue which can yield you better returns.