You can earn higher interest through P2P platforms; Know-how

Investors who wish to earn higher rates of return than traditional fixed-income instruments can also opt for a Peer-to-peer (P2P) lending platform as an alternative option. After the Reserve Bank of India (RBI) came out with guidelines on NBFCs and P2P lending last year, these platforms have gained impetus as an investment option. They act as facilitators and intermediaries and can take deposits, provide credit guarantees by themselves but cannot lend money. As an investor, you can earn as much as 12-36 per cent. However, experts suggest investors should take precautions before entering into this new investment avenue, as lending on these platforms entails high risk.

However, if you are also planning to invest in these platforms, know how to go about it.

Whom to lend: As a lender first check the profiles of the borrowers listed on them and then decide who should you lend to. These platforms provide a complete analysis of borrowers’ credit profiles to help lenders understand the risks involved. While choosing a borrower, you can even lend at different rates of interest and for varying tenures. Most of the platforms ensure that each loan is funded by at least five lenders, so the risk is well spread out. Some P2P players allow lenders to fund only up to 20 per cent of a borrower’s loan requirement, to reduce risk.

Opportunity to earn more: The rate of interest generally ranges from 12-36 per cent for loans given on P2P platforms. P2P lending platforms gained popularity because of their opportunity to earn higher returns. Through these platforms, you can diversify your investment portfolio beyond traditional options like fixed income, gold and equities. The minimum and maximum lending amount for a lender is set by the P2P platform and also varies.

Know the Fees and charges: Some of these lending platforms charge registration fees from lenders. For instance, for registration Faircent charges a non-refundable Rs 1,000, Lendbox charges Rs 500 for registration and an additional fee of Rs 500 for every investment of Rs 100,000. The transaction fee is set between 1 and 2 per cent of the loan amount. Before any money is transferred, a loan agreement is signed between each borrower and the lender.

Higher interest rates: Every P2P platform has its own range of interest rates. Depending on the borrower’s risk profile, the interest rate is set for a lender. For instance, a lender with a borrower with a higher risk profile will earn a higher rate of interest. Generally, the interest rates range from 12-36 per cent. The interest income earned is added to the lender’s income and is taxed based on the income tax slab.

Risk reduction: These platforms are mostly seen with borrowers who get turned down by banks or NBFCs for a loan and have limited access due to poor credit history. Experts suggest though the P2P platforms have credit underwriting process and risk assessment methods, they may not always be accurate. As an investor, therefore, you can reduce risks by diversifying your lending, and by limiting the amount you lend on these platforms.