In our previous posts, we discussed how P2P lending works and whether you should invest in it. Now, one big question remains in P2P lending. From the investor’s perspective, we want to know who are the borrowers and do they have the capacity to repay the loan?
And, if you need money, can you take a loan from these P2P platforms, or should you avoid it? In this post, let’s discuss P2P lending platforms from a borrower’s perspective.
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Buckle up, here we go!
Generally, before lending, banks analyse your credit history. To see if you can pay them back or not. They do this to keep their NPAs (Non-performing assets) low. Some banks are more conservative than others in doling out loans.
And, usually, they skip people with no credit score. This is the safest option for them. Right?
But who are the people with no credit score? It’s people who own your nearby kirana store, blue-collar workers, youngsters, etc. These people have never used banking services much. So they don’t have much of a credit history. They rely more on unofficial lenders for their money needs.
Therefore, NBFCs (Non-Banking Financial Company) see an excellent opportunity to serve this low/no credit history group. They start by offering low loan amounts like 5k or 10k. Slowly, they increase the credit limit based on the borrower’s repayment history.
They play a significant role in creating an official credit history for these people.
And many times, you are lending to them when you invest in P2P platforms. Not all P2P platforms lend to the no or low credit score segment.
Like, Cred lends money to its own users through its P2P platform Cred Mint. And Cred has users with a credit score of above 750 only.
Also, Bharatpe lends money to local shops through its 12% club. They have a good recollection system, and for now, it is working for them. (We never know the actual default rates until it’s too late)
So now you get the point, right? Even though the P2P platforms are open to anybody who needs money, these mainly attract people of low-income groups or with low CIBIL scores who have no other alternative to get loans.
These platforms try to have a mix of borrowers by including small businesses as well. So, each platform has a unique set of borrowers. You need to analyse them independently if you want to invest in them.
Let’s look into the charges and fees they charge to the borrowers.
Interest rate & charges on loan in P2P lending platforms
In comparison with the interest rate charged by the banks, P2P loans have higher interest rates.
They may market that their interest rate starts from 12%, but that’s conditional on your credit score and other factors. For most people, the starting interest rate charged by these platforms is 16% per annum.
Also, the charges you pay as a borrower don’t just end with an interest rate. They charge you a one-time non-refundable listing fee that’s around ₹500. And you also pay processing fees between 2 to 10%. (Check the interest rate and processing fees of banks and P2P platforms)
In terms of the amount, the listing and processing fee might look like a small amount. But when you add them with the interest rate you are paying, you find out the actual cost of your loan. You might pay over 20% interest in total on these platforms.
We found a calculator that might help you find the actual cost of your loan. Check the calculator here.
Therefore, don’t just focus on the monthly EMIs. Along with EMIs, you must check the loan tenure, processing fee and the total extra amount you need to pay, apart from the principal amount.
Should you borrow from P2P lending platforms?
By now, you would have taken a clue as to where this is headed. If you have a low credit score, you might get a loan from these platforms, but it will come at a cost. You might have to pay extra charges.
And if you have a good credit score, you will receive better loan terms from banks. But if you are someone who is willing to pay extra for more convenience, then P2P platforms can offer you more convenience. Because they are more tech-savvy.
Also, if you are a beginner and think you might need a loan in the future, you can start building your credit score with a credit card. Read more here.
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