Peer-to-peer lending is a type of financing where an individual/business entities can get a loan from other peers including other businesspeople and investors (not a bank or financial institutions) registered on a P2P platforms. This is also known as P2P lending, crowdlending or social lending. According to Reserve Bank of India, “Peer to Peer (P2P) Lending Platform” means an intermediary providing the services of loan facilitation via online medium or otherwise, to the participants. The P2P platforms, acting as intermediary, onboard investors and borrowers and enables them to lend and borrow money respectively without the use or involvement of any financial institutions. P2P lending caters to small businesses and entrepreneurs who cannot qualify for bank financing or other financial institutions requirements. These platforms have helped in eliminating the middlemen and has made the process more efficient.
Benefits
Given below are a few of the benefits of P2P lending for startups and small businesses:
- Rates of interest
- Lower rates of interests as compared to traditional forms of funding such as banking and other financial institutions.
- This is dependent upon the loan amount, tenure, and credit score of the borrower.
- No collateral is required
- Because loans are unsecured, borrowers with low credit score can also apply for loans which are usually rejected in the conventional form of lending.
- Efficient process
- Since these P2P platforms are operated online, this helps in making the process quicker and easier by enabling the borrower to fill up online forms unlike banks and other financial institutions.
- Ease of Prepayment
- Prepayment of loan is possible without levy of any type of penalty
Restrictions
Given below are RBI restrictions on the P2P lending:
- The maximum amount that a borrower may borrow at any point of time, across all P2Ps are capped at Rupees 10 Lakhs.
- The maximum amount that a borrower may borrow from a particular lender across any platform shall not exceed Rupees 50 Thousand.
- The maximum tenure for the loan cannot exceed 36 months.