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What If A Borrower Defaults On Your P2P Loans?

Every investment brings with itself some amount of risk. Even investments as direct and seemingly safe – such as real estate and gold, can go through hard times. It’s only natural then, if you expect P2P lending to cause an upset too. But you’re likely to overestimate your risk here. Like any other investment, you’ll need to guard against risks – such as defaulting borrowers.

When you are a beginner in P2P lending, it is prudent to check the collection support/effort the lending platform will provide, in case of borrower defaults. At Monexo, we are both proactive and transparent on these matters.

Here is a guide which would help you secure your P2P investments and lessen your worry.

Securing Your P2P Investments

P2P lending platforms follow a general process when it comes to dealing with delayed payments, which involve collection, recovery and other safeguards. Let’s study Monexo’s process in detail and understand what measures it provides to secure it’s lender’s money.

The Collection process at Monexo

Here’s an overview of the process at Monexo when a borrower is late on repayments and is moved to the collection process.

1. First Stage: Between 1 to 15 days of delay, Monexo sends out emails, followed by calls to the borrower notifying about the delay in repayments. At least 2 attempts for automatic deduction (using NACH debits) are made during this period, post which late fee penalties start getting applied.

2. Second Stage: If the borrower continues to delay his repayments (between 31-60 days), Monexo then authorises a collection team to do physical visits and collect the payments. The lenders don’t need to bother themselves with these visits as this is managed from Monexo’s end. By this time, the delay in payments start getting reflected in borrower’s credit history thus bringing down his credit score and significantly impairing his ability to get new credit.

3. Third Stage: At this stage between 61-90 days, legal measures will be initiated – including the filing of a legal case for recovery of pending dues. The penalties over delay will continue to be applied.

4. Last Stage : If the borrower still hasn’t repaid, the loans written off as an NPA per the RBI’s directives. However, the collection and legal recovery efforts made by Monexo will still continue

Bringing transparency to the collection process

At Monexo, significant technological investments have been made to ensure that lenders are able to track their P2P investments with utmost ease. All lender transactions with Monexo are logged and recorded and for every lender there is instant access to this information any time, any place

  • Once a lender logins to the Monexo dashboard, she/he can view her/his entire portfolio, along with currently open loans, all repayments, delays and other updates.
  • For all delayed payments, Monexo transparently updates all its communication with borrowers – including email exchanges, call recordings (even those that don’t connect) and other collection updates it receives during the entire process.

What other measures does monexo have to protect your investments?

At Monexo, we are continuously striving to develop innovative solutions to protect the interests of lenders. As part of this effort, we have launched Credit Shield. With Credit Shield, if a borrower is unable to honor his repayments due to some unforeseen circumstances, Monexo still has you covered. Credit Shield is a group insurance policy designed to protect lenders in case the borrower is unable to make his repayments.

For a borrower, there can be some unforeseen scenarios –

  • Such as a loss of job,
  • Accidental death, or
  • Even disability,

These scenarios can put the borrower’s repayment schedule in trouble. There is where Monexo’s Credit Shield steps in – it diverts the proceeds of the insurance to cover up to 100% of the lenders’ outstanding principal.

What’s better?

  • No paperwork for lenders – The borrowers make the claim, which is then processed and the claim proceeds are applied directly to outstanding loan amount
  • Completely free – And did we mention this is completely free for the lenders? There’s no premium or payments that you need to make to get this coverage

We’ll discuss Credit Shield in a separate post of its own soon.

But apart from the protection provided by the platform, there are additional ways through which you can protect your investment such as

1. Diversification – At Monexo, lenders can lend as low as 1000 Rs to single loan contract and thus spread there investments over a larger number of borrowers.Diversification is like the holy grail of P2P Lending. If your investments are adequately spread across multiple borrowers, the impact of delayed payments can be greatly minimised and the security of your portfolio significantly enhanced.

2. Loan selection as per your risk appetite – At Monexo, loan contracts are risk graded on a scale from M1 to M8 . M1 denotes a very low risk and thus a lower return and M8 denotes a high risk and thus are priced higher with high return for lenders. This internal grading allows lenders an unbiased perspective on the quality of the borrowers. Lenders are well advised to lend only to loan contracts that match their risk taking ability.

Why is it important to create a passive income source, and why P2P lending is ideal

Passive income is income that you generate, as they say, on the side. The effort on the recipient’s part is minimal, and yet there’s a continuous flow of money. Broadly, there can be two kinds of passive income:

  • Income received from rental property;
  • Income generated from some kind of professional service, or investment

One way of generating passive income is – P2P lending. P2P Lending, or Peer to Peer lending, involves lending money without the involvement of any financial institution. There are portals like Monexo that help people take part in P2P lending by matching the borrowers with the lenders., It can prove to be ideal in many ways if you’re looking to generate passive income. Let’s dive deeper.

Why passive income?

Our economy today has evolved to an extent that there are plenty of sources to make money. People do prefer to choose safer options – such as saving in a bank. Some people even invest in the share market and mutual funds. Although in India, the number of investors is only about 1.5% of the total population (2015 – Bloomberg).

There are others of course, who invest their money in fixed deposits (FD). They’re not earning large returns either. So what are they missing out on?

Passive income can be generated through many ways

  • Writing books
  • Renting your property
  • Creating a product through which you keep getting royalty
  • Investing in dividend paying stocks, and even becoming a YouTuber!

But is it necessary to generate passive income? Wouldn’t you rather spend your non-working hours relaxing or getting some rest?

Why You Need Passive Income

  • Passive income means lots of free time! All the relaxing and rest you’d rather do? Passive income enables it! Passive income doesn’t require too much recurring work to be put in. If you’re not working to generate this extra money, you’re obviously freeing up time for yourself while earning a decent amount. You might even be involved in a tiring full day job and still be earning less than you can with right passive income sources. There are many people out there who work tirelessly day and night to make both ends meet, and are able to spend neither time nor money on things they or their families enjoy.
  • Passive income gives you stability and security. No job ever comes with a never ending 100% warranty card! The future is always uncertain and your business, your company, or whatever it is that you’re involved in might suddenly shut down or face huge debts. Passive income has a huge role to play here. It can act as your contingency plan in unfortunate events. Your passive income would come to your rescue, and you’ll always have the safety net to make ends meet.
  • Passive income helps make life stress free. At some point or the other, many don’t have a job that pays well, or sometimes they don’t even pay on time. If you are involved in such an atmosphere, more often than not, you’re tensed about your next paycheque. Needless to say, this can be frustrating. It can take a toll on your personal life and even health. If you’re generating passive income, budgets are easier to manage, and life isn’t a never ending countdown to the end of the month. You’ll always have money!
  • Passive income is your stepping stone to financial freedom and flexibility. With income levels sustaining you well, they open up the possibility of letting you pursue what you want, and plan for short term happiness without causing a dent in long term plans and stability!

Now that we’ve well established the significance of a passive income, let’s take you to the hottest way to generate it – P2P Lending.

Why P2P lending?

Peer to Peer lending, also called social lending at times, is another example of the multiple ‘shared economies’ we’re seeing spring up lately.

An Uber involves sharing cars to generate income.

An Airbnb or an Oyo involves sharing accommodation to generate income.

Similarly, P2P lending involves sharing your wealth to generate more income.

The concept originally began with the aim of connecting lenders to borrowers. It has now gained a wider recognition and become quite popular among small investors and businesses. P2P lending eliminates the financial intermediaries, so there’s minimal paperwork to be completed before getting a loan, which is quite often the bottleneck before loans are approved by banks.

In a P2P lending setup, we have a free market between lenders and verified borrowers. Lenders are free to lend money, at attractive interest rates, to multiple  borrowers. It’s the classic free market, with lenders competing to fund the best borrowers, and borrowers seeking to offer the highest returns to attract lenders.

Let’s find out the reason behind the popularity of P2P lending, and why is it important.

  • We know how difficult it gets for the Small and Medium Enterprises (SMEs) to get loans from banks. They have to sign a thousand papers, submit many documents for verification and even then, banks take a lot of time to verify the borrower’s profile. In P2P lending, the background verification process is way faster and easier. And once the profile is verified, there’s no waiting to receive the money. Consequently, there’s plenty of borrowers who’d rather take a loan this way.
  • A lot of lenders are jumping on the P2P bandwagon because it generates passive income for them. With the right amounts invested, your returns – coming in the form of EMIs by borrowers – can rival your monthly income.
  • The rates beat many other investments! At Monexo – lenders can make anywhere between 13% to as high as 30%!
  • Unlike many other sources of passive incomes, the returns from P2P lending are fixed, and you know how much you’re going to generate every month, and for how long. The lack of ambiguity is a big plus for many.
  • These fixed monthly returns also make P2P lending a unique form of investment. Other asset classes – such as mutual funds, equity markets and others – involve keeping your principal invested to generate returns. If you’re lending via P2P models, you’re getting your principal back every month as well!

There you have it. P2P Lending is solving multiple problems at once – it’s a solid amount of passive income, with no ambiguity, high returns, and you’re helping businesses borrow and grow in the process. It’s the ideal win-win scenario!