Pros and Cons of (Peer to Peer) P2P Lending License

Peer to Peer Lending is a way to match borrowers and lenders via the P2P Lending portal. Its digital and easy-going nature has gotten the attention of most modern entrepreneurs. However, much like every new technology, the P2P lending license also has its shares of pros and cons.

A few years ago, some like-minded digital savants came up with a unique idea. And the idea was to remove the bank from the equation during the loaning process. It was revolutionary and could have put technology at the forefront of financial services. However, the regulations of that time couldn’t accommodate it. As a result, it ceased to exist. 

Or did it?

Peer-to-peer lending bears similarity to that original idea. It establishes a P2P Lending platform that people can leverage to avail loans from independent lenders.   

The platform acts as a haven for lenders who wish to earn a passive income. For borrowers, the platform becomes a source of funding without immense documentation. 

This new mode of borrowing and lending finally landed in India during the second half of the last decade. Thus, RBI established guidelines to regulate it by making the P2P Lending license mandatory. It ushered in a new era where one can find the funding they require without banks acting as intermediaries. 

However, like all other new fintech developments, P2P lending has pros and cons. 

Let us discuss them. 

Pros of Starting a P2P Lending Platform

Following are the advantages that have made people gravitate towards peer to peer lending portals:

Attractive interest rates for borrowers and lenders:

Borrowers can acquire funding at attractive interest rates. However, there is a caveat – their credit score should be optimal.

Lenders can utilize the portal to generate passive income. 

Less intrusion from banks:

Banks are not at all involved in the lending process. As a result, borrowers don’t need to furnish a lot of paperwork other than providing their credit scores. 

The lenders also have the benefit here as they can assess the borrower without requiring a bank. The portal gives a credit score calculator that analyzes every borrower registered at the website.

Online process of lending and borrowing

“Get quick loans” isn’t a marketing term anymore. P2P Lending platform allows the borrowers to acquire loans within 5 minutes.

The lenders don’t have to wait for their passive income. The portal provides payouts at regular intervals if the borrower pays the instalment on time.

Lenders can access contingency plans:

If a borrower defaults on loans, lenders can use the platform’s contingency plans to get insurance on their lent amount.

P2P lending can be tax-free in some instances:

The income you receive via interest through the P2P lending platform is tax-free if you use a specialized RBI-sponsored account.

Also Read: Payment Gateway License

Cons of starting a P2P Lending License

There are advantages to conducting business on the P2P lending license, and there are also disadvantages. 

RBI doesn’t cover the lent amount:

The norms for RBI about Peer-to-peer lending are still new. Thus, it has not put much thought into what happens if lenders don’t get back their money.

The interest rates can be high:

Most platforms are lender-centric. Their task is to aid investors to make passive income. Thus, high-interest rates are allowed that aren’t attractive for borrowers utilizing the portal for the first time. 

Most platforms don’t provide insurance services:

Providing insurance for the money a lender has given the borrower is a unique selling point of only a few platforms. Most are afraid to venture ahead. Thus, it creates an air of distrust around P2P lending services.

Poor credit rating can sometimes be unfair.

Not all P2P lending platforms follow RBI’s regulations about credit rating. Some portals use their own parameters. In some cases, it causes unfair assessment of the borrowers.

Lenders might earn less during early repayment:

If a borrower pays the loan early, the income that the lender would have earned will lessen. Therefore, most lenders won’t show interest in the platform for any other purpose than lending enormous amounts.

Also Read: Difference between UL VNO license and ISP License

Conclusion

Starting a P2P Lending platform is a noble endeavor. However, You must understand its pros and cons from the perspectives of the lenders and buyers. Understanding them will help you analyze your business requirements before starting this fintech portal. For further details, contact our experts.