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How to choose the right P2P lending investment product?
How to choose the right P2P lending investment product?
Peer to Peer (P2P) lending means direct lending between two peers. A peer could be a business or an individual.
Let us first understand lending or credit.
Lending is giving a loan/debt/credit to another party that this party promises to repay at a future date. Interest is the extra the borrower pays to the lender for the time and risk they contribute.
The word 'credit' comes from Latin and means 'they/she/he believes in the borrowing party's promise to repay.
While lending may have originated with one individual giving a loan to another, it has evolved with the advent of modern banking. Formal banks are in fact traced to the early 15th century.
Typically, depositors like us put money in a bank and the bank gives us some interest earnings. The bank further lends this money to those seeking loans at a higher interest rate and keeps the difference (usually a fat one) as its income.
With technology and evolving regulation, these services can be implemented between 2 peers without a bank in between.
In late 2017, the Reserve Bank of India (RBI) came up with a regulatory framework to enable peer-to-peer (P2P) lending with retail investors on one side as lenders and individual borrowers on the other side.
This regulatory framework allows a select set of organizations to operate P2P platforms and undertake services such as underwriting, transaction management, collections, etc.
These platforms are technology-first and charge low margins. Thereby enabling investors or lenders to earn direct and thus high income as interest earnings from borrowers. It is important to note that in this case, the risk of the borrower defaulting is also on the investor.
Across RBI permitted P2P platforms you can choose from a variety of borrower types and products. Here are 5 important things to assess:
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