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Is P2P lending a good investment?

P2P lending has experienced rapid growth in India. Several P2P lending platforms have emerged, offering loans to individuals and small businesses. The market size has expanded significantly, driven by factors such as increased internet penetration, the need for accessible credit, and the rise of digital lending solutions.

What is P2P lending?

The practice of lending and borrowing is as old as the existence of money. With traditional money lenders giving loans to individuals at very high interests, as they did not have access to formal lending channels these borrowers were exploited by the Sahukars.

However, Peer-to-Peer (P2P) Lending has revolutionized this practice by establishing a marketplace where trustworthy borrowers and investors looking for lucrative investment options through RBI-monitored mechanisms for the investment of lender’s funds directly in borrower profiles without the involvement of banks. 

The prime reason P2P lending has become an attractive investment option for Indian investors is the high return rates. The returns earned by investing in P2P lending are higher than the interest earned by investing in most traditional asset classes. Investors in India are looking for diversification in their portfolios. P2P lending provides an opportunity to diversify investments by lending money to multiple borrowers with varying credit scores and risk profiles.

Another reason why P2P lending is becoming an increasingly attractive investment option for Indian investors is its flexibility. P2P lending platforms allow investors to choose the amount they want to lend and the duration for which they want to remain invested. This means that investors can tailor their investments to their specific needs and investment goals. The hyper-diversification allows investors to diversify their portfolios and spread their risk across multiple loans and borrowers.

P2P lending is also a relatively easy and hassle-free investment option for Indian investors. P2P lending platforms handle all the paperwork, loan disbursal, and loan recovery processes, making it a convenient option for investors who do not have the time or expertise to manage their investments actively. Additionally, P2P lending platforms offer a transparent and secure investment process, with all loans and borrowers listed on the platform. Investors can access all relevant information about the borrower, including their credit score, loan history, and risk rating, which allows them to make informed investment decisions.

However, before considering P2P lending as an investment avenue, it is crucial to evaluate its potential benefits and risks.

Higher Returns:

One of the primary reasons investors turn to P2P lending is the potential for higher returns compared to traditional investment options. By cutting out intermediaries, investors can earn higher interest on their lent funds, typically at rates that surpass those offered by traditional methods. 

Diversification:

Investors often strive to diversify their portfolios to mitigate risk, and P2P lending can contribute to achieving this goal. Since P2P lending is a non-market-linked investment opportunity, investors can allocate a portion of their wealth in this new-age asset class to balance their portfolio and mitigate risk.

Accessible Investment:

With lower entry barriers compared to traditional investments, P2P lending allows investors to start with smaller amounts, making it accessible to retail investors who may not have significant capital to deploy. The process is 100% digital and is accessible to anyone who is seeking to diversify their portfolio beyond traditional assets.

While P2P lending presents opportunities, it is crucial to recognize the associated risks. Default risk remains one of the primary concerns. Borrowers may fail to repay their loans, leading to a potential loss of principal and interest. LenDenClub has had zero principal loss since its inception, which means no investor has ever lost his investment amount on the platform. 

The RBI has also been actively monitoring and regulating P2P lending to ensure investor protection and financial stability. This has helped build more credibility amongst the investors. P2P lending offers the potential for attractive returns, diversification, and is a non-market-linked investment. However, it is not without risks, and investors must carefully evaluate the platforms they choose, assess borrower profiles, and conduct due diligence. P2P lending should be viewed as a part of a diversified investment portfolio, and investors should consider their risk tolerance, investment goals, and liquidity needs before committing funds and should ensure that they invest in an RBI-registered platform.