Rising investor demand has fuelled the growth of P2P Lending as an appealing alternative to financial institutions, mutual funds, stocks, and traditional banks. Like other “bond” investments, a personal loan serves as an opportunity for lending money to “other individuals” to gain a lucrative interest rate yield.

Like all other purchase decisions, the selection of risk based investments (think private equity, mutual fund schemes, etc.) is based on the expectations of investors and the investment’s ability to fulfill its goals. This is true for peer-to-peer loan investments as well. P2P financing is in the form of unsecured Personal Loans. So, if you happen to be an investor looking for a non-traditional, alternate asset class to park your surplus funds in, then, P2P loans would provide a decent income scenario.

P2P Loans - Net Returns and Interest Yields
While corporate bonds, CDs and treasury bonds may yield slightly more than 1% to 2% returns, some mutual funds and SIPs are known to give an average rate of 13-15%. However, P2P lending marketplaces are performing far better. For example, Faircent is delivering 18-22% risk adjusted returns. Numerous P2P platforms are making it feasible for investors to diversify across different types of peer-to-peer lending notes. They are encouraging investments into fractional loan shares at interest rates varying from 12% to 30%. With technology backed loan management to fall back upon, hundreds of investors are now contributing incrementally to such loans.

Default Risks for Investors
Peer-to-Peer investing has an essential caveat – some personal loans will default. Therefore, the final net returns are capable of being lower than what their top-line interest rates suggest. So investors should clearly understand that not all loans would benefit from full repayments of principal and interest. Hence, return expectations should be risk-adjusted. Investors must manage their portfolio by spreading the overall risk across borrowers from different risk categories. For example, on Faircent, we list borrowers across risk buckets – from low risk (12-14%) to high risk (26-30%) loans. Also, these are debt-based investments. In case of default, an investor can pursue legal action against the borrower. In case of stock-market or mutual funds crash, investors have no recourse against loss incurred.

No lock-in period, In fact, enjoy the benefits of compounding interest.
Mutual funds or SIPs generally have lock-in periods. Most mutual funds lock-in investments for a period of 3 years. In P2P lending the principal as well as EMI starts coming back to the investor from the very next month of making the investment. Most lender re-invest the amount and increase their returns by compounding. No other alternative investment opportunity extends this benefit.

The Growth and Popularity of Peer-to-Peer Loans

P2P loans are fast emerging as a unique kind of ‘alternative’ asset class with desirable yields to finance, say, wedding personal loans, education personal loans, or home improvement personal loans. Debt Consolidation is another popular purpose to seek personal loans. With NPAs being the latest bane of the Indian economy, making it hard for borrowers to access credit from traditional lenders, P2P platforms are gaining more significance than ever before. The prosperous growth of the Indian P2P marketplace, along with the introduction of RBI backed regulations, is making it feasible for both borrowers and lenders, as well as their advisors, to access personal loans.

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