In Part 1 (click here) and Part 2 (click here) of our series – P2P Lending: How to Get it right? we focused on what is P2P lending and how borrowers and lenders can make the most out of this innovative financial product.
To summarize, P2P lending brings borrowers and lenders directly in contact with each other thereby removing intermediaries like banks and other financial institutions. The margins kept by the intermediaries gets passed on to the end users. Hence, borrowers can avail personal loans at lower interest rates while lenders can make grater returns.
On Faircent.com, interest rates start at 12% and each borrower is assigned an interest rate as per his ability, stability and intent to repay carefully calculated by our automated underwriting mechanism by evaluating borrower’s personal, social and financial data across more than 120 parameters. Similarly, Banks through savings accounts or fixed deposits provide interest rates of say around 6-8% on surplus funds invested with them. Whereas, P2P lending in India today is giving a return of 15%++ to lenders providing an opportunity to them to become a bank themselves.
However, these returns are subject to the lenders investing smartly and in Part 2 we had focused on how P2P lending is a risk-based investment and provided tips on how to increase returns by mitigating and managing risk.
Often the question arises that if P2P lending is a risk-based investment just like shares, stock market or mutual funds, then why P2P lending?
Here, we give you 3 reasons to why P2P lending is a better investment opportunity as compared to other risk-based investments.
First, P2Plending does not have a lock in period like an SIP or Mutual Fund. Most SIP and mutual funds, lock-in your investment for minimum 3 years. However, in P2P lending, returns – both principal and interest – starts coming into your bank account from the very next month. Since you are earning month on month, you can even reinvest these returns back on the platform leading to even better returns. Hence, you can compound your returns and earn more.
Secondly, P2P lending is like putting money in debt. You are lending out money to a borrower against who you have certain legal recourse available in case he doesn’t return your money. You can’t do anything if you lose money on stocks. Most responsible platforms work with their lenders to manage and mitigate risks. At Faircent, we have taken many steps like limiting investment at 20% of a borrowers requirement, investing heavily in constantly upgrading and enhancing our state-of-the-art underwriting meachanism to ensure that a highly curated marketplace is available on our platform for lenders, ensuring legallly binding agreements and processes are in place. Still defaults can happen and taking legal action is an option available with lenders.
Thirdly, although this varies from time to time, we have seen that returns can be higher provided you invest smartly. Currently, Faircent is providing 18-22% return to its lenders who have built diversified portfolio (Refer to part 2 to learn more)
A smart investor will never put all his eggs in one basket. He will invest across various investment opportunities like
- Equity (stocks, mutual funds, SIP)
- Deposits (like Saving, Recurring or Fixed deposits in banks)
- Real Estate
- Gold and
- Alternative Investments like Commodity, Art, P2P lending
A healthy ratio is 80:20 wherein 20% of total investments should be in alternative investments. P2P lending is slowly eating into the share of other investment opportunities and smart investors are making the most of it. Sign UP now as a lender on Faircent, because every % counts!