“Peer to Peer Lending” is a debt financing option enabling individuals to borrow and lend money without the presence of any regulated financial institution as an intermediary. P2P platforms are gaining more acceptance due to less volatility and higher yields compared to other investment options.
P2P platforms disburse loans quickly; post credit profiling that is in sync with real risks. P2P can form an essential part of investment portfolio for investors due to the minimal risks involved and the assured returns.
Borrowers look for small and short term financial help to expand their business, or for events like weddings and rituals. Financial resources are also required for term investments in real estate development and businesses. Banks seldom provide loans to the real estate sector bringing opportunity for P2P fund raising for the sector.
P2P platforms in real estate empower both the lender and the borrowers. In real estate, P2P lending enables developers to raise funds at the right time. And in turn gives the investor returns that can outweigh other growth assets in the same asset class.
So how does P2P benefit the lenders?
Peer-to-peer lending platforms allow the investor to diversify his investment. The yields are higher and the average returns on the platform ranges from 18-30 percent depending on the deal. .
In terms of liquidity, P2P comes with neither short term nor long term capital lock-in. The deal can be structured or customized as per individual requirements of the investor. EMIs can be further re-invested into traditional asset classes or revolved within the peer-to-peer loan market. The money compounds over a reasonable period.
The yield rates on the P2P platform respond to changes in the base rate. It does take inflationary impact into account to ensure that the real returns to the investor can be positive.
P2P platforms give autonomy to the investor while making decision. The reverse auction model helps in fair price discovery of the loan. The lender decides the rate of return he is aiming for and then takes lending decisions which is highly data driven.
Even on the risk-return pay off matrix, peer-to-peer funding is well balanced in comparison to other options the same category. In a developing economy fixed deposit options or other standard debt options can never overcome the impact of inflation. The returns and flexibiltiy options peer to peer lending platforms provide, far outshines the benefits of these investment categories.
Banks and private financial institutions make their profits on interest arbitrage. They raise loans on lower interest and lending at much higher rates.
Since banks refuse loans to real estate sector, another option open to the real estate sector is Crowd funding and REITs. Crowd funding enables raising money through an internet platform enabling deep discounted purchases in projects, both commercial and residential, at an early stage and then making an exit after 1-3 years. REITs are investment vehicles that allow both small and large investors to participate and acquire real estate properties. Lower entry barriers in both REITs and Crowd funding, help investors to participate in larger commercial and residential projects., mostly decided by the fund managers and enjoy the returns.
In the case of P2P funding, managed by a competent fund administrator or manager , the investors clearly know where their investment are done and can watch these investments grow. The administrator will ensure that your P2P investment will work for you while you sleep. Hence, it is important to identify a competent portfolio manager or administrator for your P2P investments.
There are advantages that come with being part of various P2P investment platforms managed by competent administrators. Reputed project management advisors/administrators have the advantage of strong relationships with local market to identify profitable deals for the investor. Under their guidance the investors quickly associate with brands that bring them the gratification of having control and transparency about the deal that they are part of.
P2P investments are not part of publicly traded investments and hence are not subject to fluctuations. Investors work with credible borrowers and choose investments that are just right for them.
India has been witnessing an unprecedented surge in P2P investing options over the past one year and for the kind of flexibility and innovative structures these platforms offer investors, one can be rest assured that these options will grow manifold in the years to come.