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From relatives helping in financial emergencies to businesses borrowing money for their needs, India has always embraced the lending culture. Such lending approaches depend on trust or collateral.
This conventional process of lending money has transformed into a technologically advanced process. That’s where the discussion of peer-to-peer lending comes into being.
2012 witnessed the advent of P2P lending in India. Since then, it has become the best replacement for traditional lending. In this post, you can get information on P2P lending.
When individuals look for a loan, they usually visit financial institutes (like NBFCs) or banks.
But considering your low income, bad credit score, and improper paperwork, banks or financial institutes may reject the loan application. That’s where peer to peer lending comes at your rescue.
P2P or peer-to-peer lending is a process of lending money directly to businesses or individuals. Financial institutions do not participate as the intermediary in such deals. P2P lending offers unsecured and secured loans.
P2P transactions occur between two parties via peer-to-peer lending apps or websites. So, it eliminates the work of a middleman (a bank or financial institute). The process connects lenders to borrowers, who need to pay the interest to the lender.
Whether you have low CIBIL scores or low income, P2P can serve you during the need of the hour. A borrower can get the loan to finance the following:
It’s convenient, as you need to visit a P2P lending platform to perform the requirements and borrow money accordingly.
Below is the list of top benefits of P2P:
Peer-to-peer lending platforms offer excellent interest rates. So, borrowers can get favourable terms by applying for P2P loans on a P2P lending platform.
Peer-to-peer lending offers the best alternative financial services for people who need liquid cash. Individuals undergoing certain financial difficulties can opt for a loan.
P2P lending makes a borrower’s effort to get money easily. All you need to do is leverage online platforms and borrow money accordingly.
The best options considering peer-to-peer lending for investors can diversify their portfolios. It spreads the funds around different borrowers and reduces risks.
The following are the disadvantages of P2P lending:
P2P lending has higher risks for borrowers if they fail to repay P2P loans.
A few P2P lending sites and apps might lack transparency, considering the financial history of the borrowers. So, it makes it more difficult for lenders to evaluate risks.
If the borrower is highly creditworthy, it reduces risks from the lender’s point of view. However, it does not entirely make the investments risk-free.
P2P lending apps and platforms act as intermediaries between lenders and borrowers. So, it works differently for borrowers and lenders. Read on to understand how it works for investors and borrowers respectively:
An investor achieves the flexibility to select a borrower. So, it allows them to keep up with their risk appetite considering the investment. With P2P lending, they get valuable information like the borrower’s CIBIL history from the platform. Such details help them make better financial decisions.
If the investor does not want to take risks, they can diversify their portfolio around different borrowers. Lenders get repayments monthly, including the interest and principal amount. The lender can either withdraw the fund or reinvest the returns.
Borrowers must submit certain documents while applying for the loan via the P2P lending platform, such as the following:
Borrowers may also submit other documents that support the loan application. After submitting these documents, the P2P app or platform evaluates the candidate’s eligibility.
The lending platform determines the borrower’s creditworthiness depending on their CIBIL score, income, etc. The borrower receives the amount directly in the bank account after approval of the application.
Now, coming to the repayment process, a borrower can make monthly instalments to repay the amount. This way, they can manage repayments and plan their finances. A borrower should make timely payments to improve their credit score. It makes it easier for them to obtain future P2P loans.
You may also read this: How Can a Personal Loan Improve Your Credit Score?
In India, P2P lending has certain regulatory needs set by the RBI or Reserve Bank of India. The following are the requirements:
P2P comes under RBI guidelines. So, if a company wishes to provide this financial service, it needs the NBFC-P2P license registration from RBI.
RBI states that when a P2P platform wants to shut down, the board must act as per the pre-decided Business Continuity Plan. This plan includes the details of borrowers and lenders without misusing the private details.
Peer-to-peer lending is where investors earn interest from the loan amount. So, the interest income earned from this type of lending is taxable. As per the income tax provisions in India, the principal amount isn’t taxable. Interest earned from peer-to-peer lending is the Income from Other Sources, as per section 56(2).
The lender receives the interest with the income. The tax is based on the tax bracket an investor falls in. Suppose a lender falls in the 30% tax bracket. In such cases, the investor must pay a 30% tax on their earned interest.
Let’s point out a peer-to-peer lending example from below:
Suppose you have invested INR 1 lakh in peer-to-peer lending. So, your earned interest from your principal amount is 15%. The total amount of INR 1 lakh is INR 15,000. Thus, if you fall under the 30% tax category, you must pay INR 4,500 (15% of your total interest earned).
Tax deducted at source, or TDS, on the interest is governed by Section 194A of the ITA, 1961. Tax is deductible when the borrower is liable for a tax audit, or the payable interest is over INR 5,000 annually. Note that it’s always a borrower’s responsibility to follow the TDS provisions.
One cannot claim the principal amount as the capital gain or loss. The interest income for the loan is excluded from the GST amount. GST gets charged to the processing fee that the P2P platform charges.
Lenders might claim the GST input credit on registration as well as processing fees. They need to give their GST number. As per the 2022 budget, there are tax benefits for peer-to-peer lending investments under ITA Section 80C. There might be special provisions to reduce tax rates. This approach can benefit investors by allowing them to participate in peer-to-peer lending.
P2P lending is considered by borrowers as an alternative source of finance and by investors seeking opportunities to diversify their portfolios. But it’s necessary to consider the related costs, risks and repayment or investment terms before participating.
Some borrowers are unable to obtain loans from traditional banks. This is because the banks have strict eligibility criteria which they are unable to fulfil. Moreover, they have limited credit history. For these types of borrowers, peer-to-peer lending is a good option.
Borrowers who want funds and don’t have any assets to provide as security can also consider an unsecured loan from a P2P platform. However, they will have to fulfil the eligibility criteria and lender terms.
Entrepreneurs and small business owners may require funds for the short term to fulfil their working capital needs or for business-related expenses. They can explore P2P lending options.
P2P lending can be a good investment option for those investors who want higher returns. Because P2P lending can give returns higher than traditional fixed-income options.
Only those investors should go for P2P lending who are ready to take moderate to high credit risk. Because of the risk of late payments or default by the borrower.
Investors who want to diversify their investments among multiple borrowers can opt for P2P lending. In this way, their funds don’t remain stuck to a single borrower.
Are you wondering, ‘is P2P lending legal in India?’ P2P loans have become popular in India, and such an act is legal. It offers higher returns and a time-saving application process compared to conventional procedures.
The prime advantage is that the RBI regulates P2P lending in India, which ensures transparency between borrowers and investors. Overall, P2P lending has transformed the way borrowers and lenders communicate with one another.
It’s noteworthy that P2P can become a significant part of India’s financial ecosystem. RBI is working actively to improve the regulations for credit checks and KYC. It aims to reduce fraudulent activities, thereby improving transparency in the sector.
When banks offer 6-7% interest on one-year FDs, P2P lenders can earn more than 10% interest. That’s what makes P2P lending a profitable investment solution.
However, there are certain risks to repaying loans accordingly. While risks might make things a bit complex, there’s no point denying the fact that P2P is not as scary as equities. Investors can get a higher return with P2P lending. However, one should never undermine the associated risks before making an investment decision.
Now you know the advantages, risks, and taxes involved with peer-to-peer lending. It’s your turn to select the best P2P lending platform in India. You can make the lending/borrowing deal wisely by selecting the right platform. Find the best P2P lending app and proceed smoothly.
Yes, it’s possible to get P2P loans even with a low credit score. In fact, P2P loans are specifically for those individuals who have a low credit score and are unable to access loans from traditional banking channels. It specifically targets freelancers, first-time borrowers, and people from semi-urban regions who don’t have a great credit history. However, this loan will have higher interest rates and stricter terms.
The time taken to approve the loan by P2P lending platforms can vary among different lenders. But since the process is operated online through a website or app so it gets disbursed fast, within a few hours. However, the actual disbursement time depends on the platform and eligibility.
Borrowers have to submit basic documents for P2P loans. These documents are identity proof, address proof, income proof, employment proof or business documents, etc. You should ensure that these documents are updated so that the loan process doesn’t get delayed.
The maximum loan amount that a borrower can avail from all P2P lending platforms in total is ₹10 lakhs. Moreover, a single lender cannot lend more than ₹50,000 to a single borrower.
The majority of P2P loans are personal loans. This means there is no restriction on end usage. You can use it for personal purposes like marriage or education. Or it can be used for developing or expanding your business.
Missing a P2P loan repayment can lead to late payment charges and a drop in your credit score. If this continues, it can also lead to recovery action and increased financial liability depending on the loan agreement and platform terms.
Yes, you can prepay the P2P loan without penalties because most P2P lending platforms don’t charge prepayment or foreclosure penalties.
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Unifinz Capital India Limited is a Non Banking Finance Company (NBFC) registered with the Reserve Bank of India (RBI). lendingplate is the brand name under which the company conducts its lending operations and specialises in meeting customer’s instant financial needs.
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