P2P Lending: What You Need To Know Before You Lend Or Borrow

The rise of peer-to-peer (P2P) lending has brought a twist to the finance world. What was once dominated by banks and financial institutions is now being reshaped by platforms that directly connect lenders and borrowers. Whether you’re looking to lend for higher returns or borrow for urgent needs, P2P lending offers an attractive alternative. But as with any financial tool, there’s more than meets the eye. Here’s what you need to keep in mind before you jump in:

For Lenders: What Are The Challenges and Opportunities?

High returns are tempting, but…

Let’s start with the big draw - returns. According to a recent by LenDenClub, over 60 per cent of P2P lenders earned returns exceeding 20 per cent. Compare that with the 7-8 per cent offered by fixed deposits or even mutual funds (in the short term), and it’s easy to see why P2P lending is gaining traction - particularly among the young.

But one should remember high returns often come with high risks. About 14 per cent of lenders reported bearing partial losses to their principal amount. Unlike traditional investments, P2P loans are unsecured with little to no collateral to recover in case a borrower defaults. You might earn better returns, but you must be prepared for the possibility of some losses.

Diversification is the Key

The golden rule of investing applies to P2P lending too, i.e., don’t put all your eggs in one basket. Many platforms will allow you to lend small amounts to multiple borrowers. You can reduce the impact or risk of a single default by diversifying your lending strategy.

Manual v/s Automated Lending

Some platforms would even allow lenders to choose between manual and automated options. Manual lending means that you would pick individual borrowers based on their profiles which include credit score, loan purpose, repayment history, and more. While this gives you greater control, it also demands time and effort.

Automated lending on the other hand allocates funds based on algorithms. It can be more convenient but might lack the personalised touch some lenders prefer.

Check Borrower’s Profile

As a lender, you must take a hard look at the borrower’s creditworthiness. Most platforms will give you a detailed profile, including credit scores, income details, and past repayment behaviour. You can look for borrowers that have a proven track record of timely repayments.

For Borrowers: A Handy Tool To Handle With Care

Easy Access To Credit, but…

One of the biggest advantages of P2P lending is its easy accessibility. Where a traditional bank might reject your loan application due to strict criteria, P2P platforms often welcome borrowers with even lower credit scores. It’s a good tool to get urgent funds for any medical emergency, education, or even business. However, there’s always a high price to pay for the easy way.

Interest rates on P2P platforms can range from 12-15 per cent (or sometimes even higher). Make sure you’re borrowing for a genuine need and can manage the payments.

Transparency Is A Friend

Unlike some financial products where hidden charges can surprise you, P2P lending platforms usually have a transparent fee structure. As a borrower, you will be informed about the interest rate, processing fee, and repayment schedule upfront.  That said, always read the fine print to avoid unpleasant surprises.

Creditworthiness To Build Your Chances

If you are a borrower, think long-term. Timely repayment of P2P loans will not only prevent penalties but also improve your credit score. This will ultimately help you secure better interest rates for future loans, both on P2P platforms and with traditional lenders.

Short-term Loans v/s Long-Term Loans

Most borrowers and lenders going for P2P loans prefer short-term credit. The LenDenClub report shows that 34 per cent of lenders opt for three-month tenures. This typically aligns with borrowers’ preference for quick short-term credit, however, if you are taking a long-term loan it is important to have a solid plan in place - especially if you are stepping your foot in the unsecured lending market.

Since P2P lending is still an evolving financial tool, both lenders and borrowers need to be careful to make informed decisions.