7 Things To Consider While Availing A Loan From P2P Lenders

Peer-to-peer (P2P) loans are quickly gaining popularity as an alternative to bank loans these days. Platforms that are regulated by RBI connect individual borrowers to individual lenders who fund the loans. In some cases, loans may even be approved and disbursed faster than from your neighborhood bank branch, with minimal paperwork. But there are a few things you should consider before clicking ‘Apply’.

Here are seven tips to keep in mind before applying for a loan through P2P platforms.

1. Understand How P2P Lending Works

P2P lending isn’t like borrowing from a bank. When you apply for a loan from a bank, you’re borrowing money from the bank. On a P2P platform, you’re borrowing from individual investors. These investors fund loans approved by the platform, and the P2P platform only provides a marketplace for borrowers and lenders, handles the documentation and ensures lenders get their money back with interest.

2. Assess Your Own Repayment Capacity

This sounds obvious, but it's the most important step. “Before taking on any debt, honestly evaluate your monthly cash flow. A good rule of thumb is that your total EMI obligations (across all loans and credit cards) shouldn't exceed 40-50 per cent of your net monthly income. P2P loans typically have fixed monthly repayments, so factor that into your budget before borrowing,” says Mohan Parsuramka, COO and Head of Business - P2P at 1 Finance, a personal finance platform.

3. Verify Whether P2P Platform Is Registered With RBI

Before applying for a loan on any online platform in India, ensure that they are registered with RBI as an NBFC-P2P lending platform. Only non-bank financial companies can operate Peer to Peer lending platforms in India. Ensure that they have an RBI certificate of registration before you start sharing sensitive details on their platform.

4. Understand How Platform Treats Defaulters

Missing a payment on a P2P-financed loan is never recommended. But, if you do, consequences can be quick. “Just like traditional bank loans, most P2P platforms report your payments to credit bureaus such as CIBIL, Experian and CRIF. Late payments and defaults will impact your credit score. Additionally, they can give your account to a recovery agent or drag you to court for loan recovery. Know how they handle collections and escalation before you borrow,” says Parsuramka.

5. Check If The Loan Tenure Suits Your Needs

Loan tenures on P2P platforms in India generally range from 3 months to 36 months. “If you’re looking to borrow money for longer than 3 years, chances are P2P loans won’t be suitable for you. While shorter repayment tenures mean you become debt-free sooner, it also means your EMI will be higher than loans with longer repayment periods. Pick a tenure that you’re comfortable with,” advises Parsuramka.

6. Check The Amount You Can Actually Borrow

As per current RBI guidelines, the total amount borrowed by a borrower across all P2P platforms cannot exceed Rs 10 lakh. There are limits on how much a single lender can lend to a borrower too. This makes P2P loans an ideal solution for your smaller, shorter-term borrowing needs. 

7. Apply For A Loan Only When You Need It

Every loan application you fill out will result in a “hard inquiry” on your credit report, which can lower your credit score by a few points. If you’re applying on five different P2P lending platforms at the same time, just to ‘check out the offers’, those hard inquiries will hurt your credit score. Apply for loans only when you need one.

The Bottom Line

“Peer-to-peer lending is not a shortcut. If you've never borrowed before, you can think of P2P lending as mainstream financing. All the rules about responsible borrowing apply here too,” informs Parsuramka. 

However, borrow only what you need, know your true costs, borrow responsibly from a reputable platform, and have a plan to repay. Research ahead of time, and then apply wisely.