Say you are to decide what to invest a sum of 50,000 INR. Some of the obvious choices that you may consider are to save it all in a fixed deposit, or split it amongst a good set of mutual funds or perhaps if you possess the risk appetite, try your shot at the stock market. These choices either offer presentable upsides at the cost of added risk, or minimized risk at the expense of potential gains.
Imagine there was a way to sufficiently diversify the same pool of money, into a licensed and trustworthy credit instrument, that would offer good returns without much risk. If this sounds interesting, then Peer-to-peer lending (P2P lending) might be just the right option for you.
What is P2P lending?
P2P lending is a secure mechanism where you can borrow money without traditional financial intermediaries. For instance, say X needs some funds to begin their small-scale business. Instead of approaching a bank, X can now raise the same request for funds on a certified P2P lending platform, where X enrolls as a borrower.
Now you, the investor, can choose to support X, should you feel passionate about supporting their small business and lend them the requested amount via the same app.
With your help, X obtains the necessary capital needed to launch their business, and in return, you gain an interest component on the sum lent. This direct connection between the stakeholders bypassing middle agencies like banks, empowers individuals to support each other’s necessities while earning returns on their investments.
Why is P2P lending safer?
Peer-to-peer lending offers a compelling argument due to its low risk and high control compared to other investment methods like the stock market and real estate. While liquidity might be limited in P2P lending, the ability for investors to directly choose borrowers and monitor their investments can mitigate risks effectively.
In addition to this, P2P lending platforms often provide detailed information about borrowers, enhancing transparency and enabling investors to make informed choices
Risk Mitigation through Credit Scoring:
P2P lending platforms employ thorough and rigorous credit scoring algorithms to assess the creditworthiness of borrowers. These models look at various data points such as credit history, income, employment status, loan purpose etc. analyze them and compute the risk associated with each borrower. By utilizing these algorithms, P2P platforms can assign risk grades to borrowers, allowing investors to make informed decisions based on the data assimilated.
Diversification:
Using a P2P lending platform, you can diversify your portfolio across multiple loans. P2P platforms typically offer a wide range of loan opportunities with varying risk profiles, loan terms, and borrower characteristics. By scattering your investment across several loan instruments, your risk exposure in any single instrument is significantly minimized.
Loan Servicing:
P2P lending platforms usually have well defined loan servicing and collection procedures in place to handle delinquent or delayed loans. These procedures may include early intervention strategies, automated payment reminders, and, if necessary, debt collection processes. By providing collection services for delinquent loans, P2P platforms aim to minimize losses for investors and maintain the overall integrity of the financial system.
Transparency:
P2P lending platforms give a lot of importance to transparency by providing investors with detailed information about loan performance, borrower metrics, and historical data. Investors have access to comprehensive dashboards (view Monexo dashboard) and reports that allow them to monitor the performance of their investments dynamically. This fosters trust and confidence among investors, as they can assess the status and health of their portfolio and make better decisions using reliable information.
While it is a fact that no investment can be entirely risk-free, these features offer some significant advantages that help reduce risks and enhance the overall safety of P2P lending for investors.
Ready to Invest Safely?
Join Monexo today to start your journey in P2P lending. With our robust platform, dedicated support, and commitment to security, you’re in good hands. Start investing with Monexo and take control of your financial future.
