How do banks or financial institutions lend money?
The money you deposit with the bank is offered as a loan to borrowers. The interest rate given to the depositor is lower than the interest rate received from the borrower of the money. That is how banks and financial institutions earn profits.
Now, if you remove the banks, financial institutions, or intermediaries from between, then, this form of lending and borrowing is called P2P lending. You, as a lender, can directly loan this money to the borrower and the borrower can directly repay this amount back to you with interest.
“What is the benefit?”
You get to earn more interest.
“Isn’t it risky?”
It isn’t if used correctly.
What Is P2P Lending?
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P2P or peer-to-peer lending removes the middleman and directly allows the lending and borrowing of money. Naturally, it requires more time and efforts from the lender, and the risk factor is considerably higher when compared to investments in banks.
Let’s understand this with an example:
If an individual A wants to borrow money from the bank for his business, then he will have to follow a process. This person, A will go to the bank and apply for a loan. The bank, in return, will run some inquiries and check the individual’s CIBIL score. Usually, in most cases, this individual will also have to provide some collateral to acquire the loan. Once the loan is approved, A will pay the instalments as well as the interest.
However, what happens if this person has no CIBIL score or does not have anything to keep as collateral?
The chances of getting a loan are slim even when person A can be trusted with the debt amount. If so, this person A can easily go to any P2P lending platform, post the requirements, and acquire a loan at a lower interest rate.
The borrower takes a loan directly from the individual willing to offer the loan, and the lender, on the other hand, can invest money safely with high-interest returns.
Why Is P2P Lending Gaining Popularity?
- If you lend through banks, then these financial institutions acquire a large portion of your money, which is not the case with P2P platforms.
- Peer-to-peer lending and borrowing is simpler than the process carried out in banks. The borrowers can acquire loans at reasonable interest rates, which can range somewhere around 12-22%. Apart from banks, other options are much costlier Personal Loan.
- The need for collateral is removed, and although CIBIL score check is a part of P2P lending, minor glitches such as no credit history or CIBIL score are avoided, which is not possible in banks.
- It is a type of passive income for lenders as their money is making money. In fact, they can receive much higher returns when compared to banks.
How to Grow Your Wealth through P2P Lending?
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Spread Your Investment
Don’t put all your eggs in one basket.
This is true, not just in P2P lending, but for all investment options. Just like how it is suggested never to put all your money in one bank, in the same way, it is never wise to invest all your money in one place. Diversify and spread the investment graph so that even if one borrower defaults, you’ll have money to cover the losses.
Note: Some borrowers may offer to pay unreasonably high interest. Beware. These people are more likely to default.
Take one step at a time and don’t rush through P2P lending. The first time you invest in any of the P2P platforms, start with a small amount. Now, this is advised for two reasons. First, go back to the above rule – that you should never put all your eggs in one basket. Second, when you are new in the peer-to-peer lending market, it is obvious that you don’t know everything about the market. There is a chance that you might invest all your money in one avenue just to find out that you could have availed a better P2P investment option.
Prefer Long-Term Loans
Once you have been in the market for a while, you can try long-term loans as these have higher interest returns.
It is considered risky to invest in long-term loans because the chances of default are high.
However, if you have been in the market for a long time, you’ll know how to suspect a defaulter. Also, you might have a chance to lend a long-term loan to a borrower who had previously taken a loan from you and cleared it. In both these cases, the risk involved is less and the interest returns are high.
The platform or the borrower will offer to pay a higher interest rate than normal because they understand that the people willing to lend for long-term loans are less.
Reinvest the Interest
Don’t pull out your interest amount immediately. Reinvest it to form a loop and let your money make money for you. Once you start receiving a substantial amount of benefits, then, withdraw. This will increase your money multiplication rate.
Where Can I Start Investing?
Even though P2P lending is an amazing option, you still need to be careful with the platform you choose and your investment techniques. i2ifunding.com is a P2P lending platform in India that offers reliable and trusted lending and borrowing opportunities. You can visit the website, explore verified borrowers, and start investing.