a.) Basics Of Peer To Peer Lending
Peer-to-peer lending or P2P lending, is a way to lend money to individuals or businesses without a financial institution, acting as the facilitator. The P2P platform has to be approved by the RBI.
b.) Minimum Investment size for Peer to peer lending
The minimum investment amount that you need to lend money can range from INR 500 to INR 10-15 Lakhs. If a lender wants to give an amount of more than INR 10 lakhs, they must produce a certificate from a CA, showing that their worth should be at least INR 50 lakhs.
The minimum investment amount one can borrow can range anywhere from INR 500 all the way up
to INR 10 lakhs on P2P platforms.
c.) Things needed to Invest in Peer to Peer Lending
To facilitate both types of transactions above, individuals or businesses must submit their KYC documents, CIBIL score, salary slips, ITRs, bank statements etc.,
d.) In-Depth
P2P lending is a revolutionary alternative to traditional methods of lending and borrowing from banks. It has provided a much-needed financial relief system for small and medium businesses (SMEs), by removing the need for a financial institution in between.
A Peer-to-peer (P2P) lending platform is a marketplace that connects individuals in need of credit with individuals and institutions willing to lend.
Any Indian resident, above 18 years of age, with a valid bank account and PAN, can lend on the platform. Any non-banking financial company listed by RBI or companies formed under the Indian Companies Act can also apply as lenders.
P2P lending helps lenders earn interest on idle money which otherwise would not earn anything.
To become an investor, you can sign up and fill in the basic details about yourself and pay the registration fees through debit/credit card, net banking, etc. Your registration will be verified within 12-24 hrs. Once approved, you can log on to your account online and start lending.
One can start with a minimum amount of Rs 750 per loan. Borrowers are registered for a period between six and 36 months. You can choose the borrower according to the loan duration suitable to you.
The registration fee is used to process and verify the documents received. It is typically adjusted towards the legal agreement and documentation done with the borrowers before disbursing the loan.
Lenders can expect returns in the range of 12-28 per cent, depending on how you spread your investment. Returns also depend on the ongoing demand for lenders on the platform.
You can control the returns by spreading the investment across borrowers at different loan amounts and rates of interest.
An individual lender can invest up to 20 per cent, high net-worth individuals can invest up to 50 per cent, and institutional lenders up to 100 per cent of the total loan amount requested by an individual borrower.
In case of any default, additional penal interest will be applied to the due amount for the duration of delay which borrower(s) will be liable to pay directly to their lender(s).
As per the updated RBI guidelines of Dec 2019, the following limits are applicable to any person(s) lending on P2P platforms:
To get started, you’ll need to create an account on a peer-to-peer lending app.
Then, you’ll be able to explore different loan options. The more sophisticated P2P lending apps typically grade loans to make it easier to weigh risk, and some even provide automatic investing tools.
Next, you’ll need to choose an investment and allocate funds. You can generally either fund the entire loan or diversify your portfolio by funding a small portion of many different loans.
Finally, you can log in to the peer-to-peer lending app to check your earnings and your investments’ progress. Then you can either reinvest any profits or withdraw them.
All P2P platforms are regulated by the RBI. P2P platforms need to register for an NBFC-P2P license to provide these services.
A lender cannot place a total of more than 50 Lakh across these platforms at any given point. Further, a lender’s exposure to the same borrower cannot exceed 50,000 across all P2Ps.
In the P2P loan process, a lender’s earnings comprise the interest earned on the loan amount.
This interest earned from P2P lending comes under 'Income from Other Sources' in accounting terms. It will be added to your income and taxed as per your tax bracket. If you fall under the 20% tax bracket, you will have to pay a 20% tax on the interest earned.
Any Indian resident, above 18 years of age, with a valid bank account and PAN, can borrow on the platform.
You can sign up and start the registration process. You must fill in the basic information, pay the registration fees and upload the required documents. Once your identity is verified and your credit profile checked by the platform, you will be qualified to borrow. Once your registration as a borrower is approved, you can apply for a loan on the platform.
Apart from the CIBIL score, other parameters like repayment ability, income stability, past performance and intention of the borrowers, and documents like salary slips, bank statements, and ITRs, among others, would be required while applying for a loan.
P2P platforms adjust the listing fees towards the final processing fees if the borrower is funded through them. The in-house credit team of the P2P firm does the risk assessment of each borrower which involves cost, time and effort.
If it is for personal use, the loan amount can vary from Rs 30,000 to Rs 5 lakh. For business purposes, you can apply for a loan of up to Rs 10 lakh.
Loan tenures can vary from a minimum of six months to a maximum of 36 months.
Some companies, for example, Faircent, do not allow a single lender to fund the entire loan requirement of a borrower. Your loan is likely to be funded by multiple lenders.
You can close the loan three months after the disbursal without any additional charges. Pre-closure before three months can be done after paying the balance interest due to lenders for a period of three months from the date of disbursal. This is payable directly to lenders. P2P platform may charge a one-time non-refundable pre-payment fee.
Interest rates are calculated by an automated credit appraisal system that uses the personal and financial information provided by borrowers. The interest rate ranges from 12 per cent to 28 per cent. Unrated borrowers may be registered at higher interest rates.
Borrowers can avail of both, unsecured as well as collateral-based loans.
To Find out more about Peer to Peer lending and borrowing, please kindly contact us and our knowledgeable and experienced consultants will be happy to give you an informed and educated understanding of the best options available for you personally.