In this comprehensive guide, to provide the reader with a clearer understanding of the lending options available today, we will compare P2P lending with traditional lending with regards to their nature, benefits, and possible risks.
When you get to the end of this blog post, you should have a greater understanding of which of these two might work better for you.
What is P2P Lending?
Peer-to-peer (P2P) lending is a new type of financial service that connects borrowers with lenders via online platforms. This method eliminates the use of conventional financial system institutions, especially for those who need loans as well as those who have money that they would wish to lend.
P2P lending works on an intermediary basis in which they do not provide loans but help lenders to view the requests and provide funds to them.
Traditional Lending: A Historical Perspective
In the past, lending was a more personal activity. Before the establishment of formal banking systems, people relied on informal networks to borrow and lend money. This often included family, friends, and local merchants.
Moneylenders were another common source of loans. These individuals or small groups provided funds in exchange for interest, often operating within small communities. While convenient, this system lacked the regulatory framework and security that modern lending institutions provide, leading to potential risks for both borrowers and lenders.
The advent of banks brought a structured, regulated environment that aimed to protect both parties involved in the loan process. Traditional lending, managed by banks and credit unions, became the standard, offering a safer and more reliable way to access credit.
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Traditionally, the practice of lending was much more informal as compared to today. Borrowing and lending in the past was not a well-regulated practice, and there was no banking system to take care of the issues. They often consisted of family and friends and local businessmen, depending on the specific needs of every household.
Money lenders were another common source of loans. These were individual or small group investors who offered capital with an agreed-upon amount of interest normally in small local societies. Despite its advantages, this system was not supported by a regulatory framework and proper security protection that modern lending institutions provide.
As societies evolved, there were progressive changes in how people lent money. The advent of banks introduced a sense of order with clear rules to govern and a system that was intended to to protect both parties involved in the loan process. Banks and credit unions adopted traditional lending, which was a less risky and more foolproof method of gaining credit.
Differences Between P2P Lending and Traditional Lending
Feature
P2P Lending
Traditional Lending
Intermediary
Online platforms
Banks, credit unions
Loan Approval
Based on platform criteria and lender interest
Bank’s credit assessment
Interest Rates
Typically lower
Often higher
Regulation
Less regulated
Heavily regulated
Funding Source
Individual lenders
Bank’s funds
Accessibility
Often easier for those with lower credit scores
Stricter credit requirements
Investment Returns
Potentially higher
Typically lower
Loan Process
Quick and digital
Can be slower and involve more paperwork
Risk
Higher for lenders
Lower for banks due to regulatory protections
Pros and Cons of P2P Lending
Pros:
Higher Returns for Lenders: Lenders can earn higher returns compared to traditional savings accounts.
Accessibility: P2P lending platforms may approve loans for borrowers with lower credit scores.
Speed: The loan application and approval process is typically faster and more streamlined.
RBI Regulation: Many P2P platforms, like LenDenClub, are regulated by the Reserve Bank of India (RBI). This adds a layer of security for users, ensuring that platforms adhere to strict operational guidelines.
Transparency: P2P platforms provide detailed loan listings of borrowers, this allows lenders to make informed decisions. Borrowers also benefit from clear terms and conditions.
Diverse Investment Opportunities: Lenders can diversify their investments across multiple loans, spreading their risk.
Technological Convenience: Advanced technology and user-friendly interfaces make P2P lending platforms easy to navigate, enhancing the overall user experience for both borrowers and lenders
Cons:
Risk: There is a higher risk for lenders, as the loans are not secured by collateral or backed by financial institutions.
Default Risk: Returns for lenders can be influenced by borrower defaults.
Higher Interest Rates: Borrowers may face higher interest rates compared to P2P lending.
Pros and Cons of Traditional Lending
Pros:
Security: Traditional lending is heavily regulated, offering protection and security for both borrowers and lenders.
Lower Risk for Lenders: Banks and credit unions usually conduct thorough credit assessments, reducing the risk of default.
Additional Services: Borrowers often benefit from a range of banking services and financial products.
Community and Social Impact: Traditional lending can foster a sense of community by connecting borrowers and lenders directly. It often supports small businesses and individuals who contribute positively to the economy.
Cons:
Strict Requirements: Traditional loans have stringent credit score and documentation requirements.
Slower Process: The loan approval process can be time-consuming, involving extensive paperwork.
Less Flexibility: Traditional lending institutions typically offer less flexibility in loan terms and conditions. Borrowers may have limited options to customize their loans according to specific needs.
Limited Access: Traditional lending can be less accessible for individuals without strong banking relationships or those who live in underserved areas with limited access to banking services.
Opaque Decision-Making: The loan approval process in traditional banks can be less transparent, making it difficult for borrowers to understand the criteria and reasons for loan approvals or rejections.
Lower Returns for Investors: For individuals looking to invest their money, traditional savings accounts and fixed deposits often offer lower returns compared to the potential earnings from P2P lending.
How P2P Lending Works on Apps Like LenDenClub
Using P2P lending apps like LenDenClub is straightforward and efficient. Here’s a step-by-step guide to getting started:
1. Sign Up
Registration: Begin by signing up on the platform using your email address and phone number.
Secure your app with a 4-digit passcode
Verify your identity by entering your name.
KYC Verification: Complete your KYC process by submitting your Aadhar card and PAN card details.
Enter your bank account details
3. Select FMPP (Fixed Monthly Payout Plan)
Choose Lending Plan: Opt for the FMPP for up to 12% returns.
4. Choose Lending Period
Lending Duration: Decide on the lending period that suits your financial goals. This could range from a few months to a couple of years.
5. Set lending Amount
Select Amount: Enter the amount you wish to lend and proceed.
6. Borrower Profiling
Automated Matching: The platform profiles borrowers based on the criteria you have selected, ensuring they meet your risk and return preferences.
7. Select Loan Tenure
Loan Duration: Choose the tenure of the loans you are willing to fund, aligning with your selected lending period.
8. Confirm Lending
Finalize: Review your selections and click “Confirm.” Your lending process is now complete.
With these steps, your lending amount is allocated to qualified borrowers, and you start earning returns based on the agreed terms. This streamlined process makes P2P lending on platforms like LenDenClub both easy and efficient
Conclusion
Why P2P Lending is Better, Easier, and Offers More Returns than Traditional Lending
P2P lending presents a compelling alternative to traditional lending for several reasons. It offers lower interest rates for borrowers and higher returns for lenders, thanks to its streamlined, digital-first approach. P2P platforms are more accessible, particularly for individuals with lower credit scores who might face challenges securing loans from traditional banks.
The speed and efficiency of the P2P lending process, facilitated by advanced technology, make it an attractive option in today’s fast-paced financial landscape. Additionally, the ability for individual investors to directly fund loans and earn substantial returns is a unique advantage that traditional savings and investment products often lack.
However, it’s important to consider the risks associated with P2P lending, including the potential for borrower defaults and the lower level of regulatory protection compared to traditional banking. For those comfortable with these risks and seeking higher returns, P2P lending can be a lucrative and viable option.
Ultimately, the choice between P2P lending and traditional lending depends on your financial needs, risk tolerance, and investment goals. By understanding the differences and evaluating the pros and cons of each, you can make an informed decision that best suits your situation.
(This article is part of IndiaDotCom Pvt Ltd’s Consumer Connect Initiative, a paid publication programme. IDPL claims no editorial involvement and assumes no responsibility, liability or claims for any errors or omissions in the content of the article. The IDPL Editorial team is not responsible for this content.)
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