Got poor or no credit score? Here is how P2P loans can help
Peer-to-peer (P2P) loans are catching the attention of youngsters across metros.
Peer-to-peer (P2P) loans are catching the attention of youngsters across metros. Easy and quick disbursements are not the only drawing points for P2P companies. The rate of interest offered on the online lending platform is another major draw.
Kannan, whose father has been a banker in his young age, says he found P2P a great place to get small loans in less time without worrying about high interest rates and pre-payment charges. “I got a loan of Rs 50,000 at 11.99 pe rcent from Finzy which is much cheaper, compared to credit cards and personal loans from any bank. Also, there are no pre-payment charges on P2P,” says Kannan.
Banks are keener to lend to people with salary accounts, preferably working with grade-A companies. Self-employed individuals find it difficult to get loans at affordable rates. For example, this is what a Mumbai-based tour and travel agent had to share about his borrowing experience with an NBFC: “I was offered a loan of Rs 50,000, but my requirement was much higher. Then, I saw an advertisement about P2P lending on the internet and got a loan of Rs 1.20 lakh for 36 months at 20 per cent interest,” says a cheerful Hanumanta Mariappa Gandiswar.
“Banks ask for too many documents and in many cases the application gets declined. I would recommend everyone to try P2P lending,” adds Hanumanta.
“The purpose of P2P lending is to cater to first-time borrowers or people who cannot get a loan otherwise,” says Shankar Vaddadi, Founder, i-lend.in.
P2P companies offer unsecured loans for tenures of 3-36 months at interest rates anywhere between 12 per cent and 28 per cent. The rate of interest is decided mutually between the borrower and the lender. P2P platform acts as a mediator between the two parties.
There is a physical verification done by P2P companies, every time a borrower applies for a loan. In case of salaried class, P2P companies verify the address and financials through the bank statement and pay slips.
But if you are self-employed, they make an extra effort and verify the location of the business, inventories, stock, etc. Once the verification is done and documents like PAN and address proof submitted, you can get a loan of Rs 50,000 per lender or up to Rs 10 lakh from various P2P lenders.
"We are looking at credit-worthy people based on our proprietary assessment algorithm. Our assessment goes well beyond credit score and at times we could pick borrowers scoring high on multiple parameters despite not having high credit score and sometimes they could even be first-time borrowers,” says Amit More, Founder & CEO, Finzy.
Banks can reject your loan application due to a bad credit score or lower salary. But 33-year-old Mohammed Abid has a different story to tell. “Despite a credit score of 867 and work experience with a renowned company, I found it difficult to get a loan from a bank because of an outstanding credit card payment. I had not been using the credit card for almost 9-10 years but the bank insisted on closing the dues else they would not give me a loan.”
“When I tried for loan with NBFCs, I found the interest rates sky high. I was willing to pay 18-20 per cent interest but they offered me Rs 4 lakh loan at 24 per cent interest despite my eligibility of Rs 8 lakh, double of my requirement. I felt exploited by these (financial institutions) and searched for alternative lending options, that’s when I came across P2P lending,” recalls Abid.
Abid got his first loan of Rs 3 lakh for 36 months at an interest rate of 18 per cent, and he pre-closed it without penalty. He applied for a second loan on the same platform and got a concession of 4 per cent. “While my first loan was for debt-consolidation. I took the second loan for buying a car which I have recently closed. My current loan is at 13 per cent and is for home improvement.”
Banks typically have a processing fees of 1-2 per cent for every new loan. And have stringent policies on pre-closure of unsecured loans. Banks may charge anywhere between 2-4 per cent for pre-paying a personal loan. Borrowers on P2P platform feel lured by zero pre-payment charges and the flexible interest rates.
"We have a 24 hours verification process for borrowers and the loans are disbursed within 4-5 days. Almost 30-35 per cent of our customer base are repeat borrowers," says Dhiren Makhija, Co-Founder, Cashkumar.
Another borrower from Kolkata, Aditya Vikram Ramgarhia on his experience with P2P loans says, “You can get a loan at the click of a mouse. The documents and other formalities take up not less than seven minutes. And the disbursals are done in just three days. I have borrowed once but referred many people including friends and relatives.”
“I had referred a friend to borrow from P2P and he got a loan at 2 per cent lower rate than a bank,” recalls Ramgarhia.
Besides paperless disbursals and competitive interest rates, P2P platforms allow borrowers to take loans for as less as three months, making them an interesting alternative.
Vinay Mathews, Founder and COO, Faircent.com, explains why P2P score over banks in the case of short-term loans. “Banks operate via branch models. It’s unviable for them to give small ticket loans that too for smaller duration. In P2P, if the loan is risky, the interest rate is higher for the lender.”
The P2P industry is about three years old in India and got its first set of regulations in October. RBI is in the process giving licences to companies subject to conditions mentioned in the official circular. All licenced companies are liable to contribute data to credit bureaus for better credit evaluation of the borrowers.
Only entities registered as a company can get P2P registration from the RBI.
Every NBFC-P2P has to obtain a certificate of registration to start P2P lending activities before starting operations.