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Why Peer to Peer Lending is an ultimate Investment Opportunity?

Robert T Kiyosaki in his famous book, Rich Dad, Poor Dad wrote, "Most people fail to realise that in life, it’s not how much money you make, it’s how much money you keep". This quote signifies the importance of investment and starting early cannot be stressed enough. If you are starting out into investing, you might not want to take risks, so invest in safer options. But invest nonetheless. 

While you might know about the usual investment options such as fixed deposits, provident funds, RBI bonds and mutual funds. Peer to Peer lending is another investment option which has recently become popular. This blog aims to address everything you would want to know about peer to peer lending and how it is a smart investment with reduced risks.

What is Peer to Peer Lending?

In simple words, peer to peer lending is a platform where lenders can directly lend their money to borrowers without the intervention of any intermediary body. These lenders and borrowers connect through online peer to peer lending platforms. These platforms are also responsible for verifying the borrowers and collecting their information for the investors, in order to facilitate informed decisions. 

What are the Benefits of Investing through Peer to Peer Lending?

Having understood what peer to peer lending is about, you must be wondering what are the benefits of this investment option. Is it the smart investment that everyone portrays it to be? The answer is yes. There are numerous benefits to it such as:

High Return on Investment

Much of the credit for the enhanced popularity of peer to peer lending goes to the high return on investment that the lenders reap. Returns in the range of 12% - 30% have been observed. The risks associated with this investment option is lesser compared to mutual funds and can be reduced further by diversifying the investment portfolio. Mutual funds can be a much riskier option due to the constant fluctuations in the stock market. Furthermore, the safer investment options such as fixed deposits and PPFs barely have returns of 8%. Thus, making peer to peer lending a lucrative option for all investors.

Monthly Payments

Most repayments are usually made on monthly basis, which means that the you will have a steady income coming your way through your investments. This EMI will be predefined in the lenders contract and is usually deducted directly from the borrower’s bank account. These instalments will be made until the entire loan amount and the interest is paid in full amount.

Complete Information on Borrowers 

It would not be a smart investment option if it did not provide complete information to the lenders to help them make informed decisions. The lenders not only know the credit scores of the borrowers but also personal information such as contact information. Furthermore, information pertaining to the loan such as the EMI, service charges and taxes are also disclosed to the lenders prior to the actual lending process to facilitate the decision making.

Easy Diversification

Since the borrowers are listed on the platform along with all the information about them, the diversification of the investment portfolio becomes very easy. Lenders can decide if they want to invest in businesses or in renovation projects or provide personal loans. 

What are the Things to Keep in Mind while Investing in Peer to Peer Lending?

While there are many perks to this smart investment opportunity, there are certain things that lenders should bear in mind before investing their money. Even though complete information is provided, these loans are unsecured in nature, which adds to the risk factor. Unsecured loans are the loans which do not require any collateral. Therefore, you should research thoroughly before lending money. This also enhances the importance of diversification as that provides a cushion against defaulters.

Furthermore, the Reserve Bank of India (RBI) allows the lenders to start with amounts as low as Rs 500-750. However, the maximum investment amount is capped at ten lakh rupees. Thus, most loans provided to the borrowers are through several investors instead of a single investor. Furthermore, it is also important to remember that unlike other investment options, the lent amount cannot be accessed at once and can only be received through EMIs. However, the duration is usually short-term to mid-term and is informed to the lenders in advance.

Bearing the above pros and cons in mind, it can be concluded that p2p lending is a better way of investingyour money, especially if you are looking for a higher return on investment than the traditional options. It is also a secure investment option with moderate risks which can be reduced by making informed decisions and diversifying your investment portfolio. Finally, since the entire process takes place online, it is easy, accessible and definitely a smart investment option. 
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