The financial world is filled with technical jargons and the same holds true when you want to take a personal loan. There are many terms that you will come across when you go out to borrow, but we tell you the key ones to look out for and its implications in the peer-to-peer (P2P) lending space.
Interest Rate – Interest rate is probably the most important part of a personal loan. Whenever you take a loan, you have to pay back the original amount, which is called the principal amount, plus a little extra, which is called an interest. The interest rate determines what this extra amount will be, which gets staggered across the tenure of the loan in the form of monthly payments. Different loans will have a different structure of interest rates. For example, personal loans carry the maximum interest rates, while home loans carry a lesser rate of interest. This is primarily because personal loans do not need collateral as security and carries a greater risk for the lender. This pushes the rate higher.
Interest rates can also be fixed or floating. Fixed interest rate is when the monthly repayments (principle + interest) will stay the same over the course of repayment. Floating interest rate is when the rate changes according to a benchmark that is used to price the loan or in simple terms according to market and economic dynamics. Accordingly, the repayment amount will change because the interest component will undergo a change.
In the case of P2P lending, interest rate is of vital significance. P2P provides one of the most competitive rates of interest. It is similar to a personal loan that a bank provides, but one where interest rates are far lower. Interest rates in P2P lending are also fixed in nature. Faircent guarantees that the interest rate available on its platform will be lower than the interest rate offered by traditional financial institutions like banks, NBFCs etc.
Loan Tenure – Loan tenure refers to the duration of the repayment period. Usually it is expressed in terms of months, which helps in determining how many EMIs you will need to pay. Different loans have different tenures attached to it. For example a personal loan can be anything from a year to five years in nature. On the other hand, home loans tend to be of longer duration and often stretch to 20 years.
For P2P loans, the sweet spot is short duration loans and usually stays within the range of five years. Since P2P loans are without any collateral and do not give out large sums of money like a home loan does, the repayment period again closely monitors a personal loan.
Balance Transfer – The principal amount of every loan, be it a personal loan, home loan, education loan, can be transferred to another bank or a financial institution after a stipulated period to get benefits of a better rate of interest. Generally, after a period of 12 months a borrower can transfer his loan to get a better rate of interest and also better terms of repayment. Balance transfer is a great way to reduce debt and although the process can be a tad tedious one should definitely go for it to reduce the amount of interest paid. Also, some banks or financial institutions have a fee levied on balance transfer. It is best you check with your bank on the fees and charges levied.
As a borrower, if you want to go for a balance transfer, P2P loans can be a great way to refinance it. P2P is well known for low rates of interest and refinancing a loan can be almost instantaneous and on very lucrative terms. In fact, on Faircent.com debt consolidation (paying off all debts by taking one debt) is the second most important purpose stated for to taking loans.
Collateral – Collateral is the security you have to extend for the loan you have taken. In the case of a home loan, the house is taken as collateral and in the case of a car loan, the car is taken as a collateral. For loans like education loan, one is often required to provide collateral for the amount borrowed. Only in the case of a personal loan, collateral is not required. However, because it is riskier, the rate of interest is generally very high in the case of a personal loan.
P2P is similar to a personal loan where there are no collaterals involved. But, the rate of interest is far lower, which means P2P loan is a great way to borrow money.
Guarantor – When a person does not have a good credit rating, the risk associated with lending is high or the borrower does not have a long credit history, banks and financial institutions may require a guarantor for the loan. The guarantor assumes the liability of the loan and will have to repay the amount in case the borrower defaults on his loan. Education loans generally carry this provision.
P2P personal loans do not require a guarantor, but some recent innovations in products have paved the way for guarantor backed P2P loans for borrowers with high risks.
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