In this article, we will understand what are P2P lending platforms, how a borrower can take a personal loan from these platforms, and whether and how taking a personal loan from these platforms can affect the borrower’s credit score.
What is a P2P lending platform?
A peer-to-peer lending platform is an RBI-licensed entity providing loan facilitation services via online or offline medium. A P2P lending platform brings together participants who want to lend money with those who want to borrow money through its loan facilitation services.
P2P lending platforms have existed in India for a long time. The Reserve Bank of India (RBI) issued guidelines in 2017 to regulate these platforms. The RBI has categorised these platforms as Non-Banking Financial Company – Peer to Peer Lending Platform (NBFC-P2P).
Some of the well-known P2P lending companies in India include:
- i2iFunding
- Indiap2p
- Lendbox, etc.
How does a P2P lending platform work?
Let us understand how a P2P lending platform works with an example. Suppose Kavita needs a Rs. 50,000 personal loan. She approaches a P2P lending platform and submits a loan application along with the KYC and other documents. The P2P lending platform does the credit underwriting.
Kavita’s personal loan application is accepted, and the P2P platform finalises the details like loan amount, tenure, interest rate, EMI, etc. The P2P platform makes the details of Kavita’s personal loan live on its platform.
Interested lenders, registered on the P2P lending platform, check Kavita’s personal loan details. If interested, they can decide how much money they want to lend to Kavita and submit their bid. Once Kavita’s loan is fully funded, the P2P lending platform signs the loan agreement with Kavita and asks the lenders to transfer the personal loan money.
Kavita receives the personal loan money and uses it for the desired purpose. The P2P lending platform collects the monthly EMI from Kavita and transfers it to the lenders’ bank accounts.
Norms for P2P lending loans
A borrower must make a note of the following RBI norms for loans taken from P2P lending platforms:
- The aggregate of loans taken by a borrower at any point of time, across all P2P lending platforms, shall be subject to a cap of Rs. 10 lakhs.
- The maturity of loans shall not exceed 36 months.
Role of credit score when taking a personal loan from a P2P platform
A borrower’s credit score is vital when taking a personal loan from a P2P lending platform. Some P2P lending platforms may have a minimum credit score requirement to be eligible for loans from their platforms. Some P2P lending platforms may give personal loans to individuals with a low credit score. However, such borrowers may be asked to get a guarantor and may be charged a higher interest rate.
So, depending on the borrower’s credit score and other parameters, the P2P lending platform may decide to accept/reject the personal loan application and, if accepted, the interest rate on it.
Impact of a personal loan on credit score
As per RBI guidelines, all registered P2P lending platforms must submit data on the credit information of their borrowers (including historical data) to all credit information companies (CICs). The P2P lending platforms must submit the data of all borrowers to CICs on a fortnightly basis (i.e., on the 15th and last date of the respective month). The credit institutions (P2P lending platforms) can report borrower data to the CICs at shorter intervals than the RBI’s mandated fortnightly basis, as mutually agreed between them.
When a borrower makes a timely EMI payment to the P2P lending platform, the platform will report the same to the CICs. The timely EMI payment has the highest weightage in the CIC algorithm for calculating the credit score. So, when a borrower makes timely loan repayment, it contributes positively towards improving their credit score.
Similarly, if a borrower delays or defaults on the timely EMI payment to the P2P lending platform, the platform will report the same to the CICs. A delay or default in EMI payment can ruin a borrower’s credit score.
Any personal loan default or settlement reported by a P2P lending platform will stay in the borrower’s credit report for years. It will make it difficult for the borrower to get any new loans or credit cards in the future. Hence, a borrower needs to make timely loan repayment to the P2P lending platform to maintain or improve their credit score.
Can a borrower use a personal loan from a P2P lending platform to build credit history?
As per RBI guidelines, P2P lending platforms can facilitate unsecured lending only through their platforms. So, they can give only unsecured loans, like personal loans. In an unsecured loan, like a personal loan, as there is no collateral, the platform will give higher importance to factors like credit score in its credit underwriting practices.
Hence, some P2P lending platforms will require the borrower to have a decent to high credit score. However, if a P2P lending platform gives a personal loan to a new-to-credit borrower (no credit history), they can use it to build their credit history. If a borrower with a lower credit score gets a personal loan from a P2P lending platform, they can use it to improve their credit score.
A new-to-credit borrower or one with a low credit score can make timely repayment of their personal loan to the P2P lending platform to build or improve their credit score. Please note that while timely loan repayment has the highest weightage, it is only one of the factors used for calculating the credit score.
The other factors include a credit utilisation ratio of 30% or lower, a mix of secured and unsecured credit instruments, maintaining a decent time gap between two credit applications, ageing of credit instruments, etc. So, to build or improve their credit score, an individual must manage these factors along with timely loan repayment.
Should you take a personal loan from a P2P lending platform?
A P2P lending platform is one of the avenues for taking a personal loan, along with banks, NBFCs, fintechs, etc. While evaluating where to take a personal loan, you must compare the features and benefits being offered by all credit institutions, including P2P lending platforms. If a P2P lending platform offers you a personal loan on better terms and conditions, like lower interest rates, etc., you may go ahead with it. A personal loan from a P2P lending platform can help you build or maintain your credit score, similar to a personal loan from a bank or NBFC.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.
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