With the advancement of technology, it has become very easy to connect with people and even verify their authenticity with accuracy. Increased use of banking services means that it is easy to send money to almost everyone instantly. All these have given rise to new age lending platforms, also called P2P lending. 

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P2P lending stands for Peer to Peer lending. Any common man having money to lend can give to any common who needs money. Since this process is highly susceptible to fraud, there is a legal governance process. 

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There are many P2P platforms available online through which you can lend money. And all of them are RBI Approved NBFCs. So, you have a high level monitoring of these platforms which makes them safe to put money into. Most of these platforms also have collaboration with recovery agencies to recover any unpaid dues.

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How it works

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Let us see how the entire process works.

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I personally use lendbox.in to lend. So the screenshots you see here are mostly from lendbox.in. 

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First, you need to create an account with any of the P2P lending platforms.

There are two types of accounts available. One is for Lenders and other is for Borrowers. You might want to create a lending account if you are planning to earn.

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After the account is created, the next step is to browse borrowers. The borrowers can be chosen according to their credit scores and of other factors like their monthly salary or the loan amount. Be careful here while choosing the borrowers.

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Once you choose the borrowers, select the rate of interest you wish to lend the money for. There are certain limits as to how much interest you can lend the money for. So you decide you interest rate accordingly.

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Next, submit the proposal and once it is accepted, pay the cash and you are done. You will receive the monthly EMIs in your bank.

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Reducing rate of interest model and Flat Rate

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Remember that the rate of interest is reducing rate of interest. You have to check the flat rate of interest to know the exact year interest rate.

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Now let's say you want to lend Rs. 10,000/- at an interest rate of 25%. Then your flat rate of interest and monthly EMIs will be

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As you can clearly see, the reducing rate of interest model makes you 25% into 13.97% flat rate. Your actual yearly returns will be 13.97%. Your monthly EMI will be Rs. 783.11/-

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The EMI is less because this calculation is done for a lending period of 15 months.

 15 * 783.11 = Rs. 11,746.72/-

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For an investment of Rs. 10,000, you receive Rs. 11,746.72/- in 15 months. This is especially good when you combine these returns with an SIP.

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Investing the returns you get into regular SIP will fetch you better long term returns.

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Improving the returns

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As said, investing in SIP will fetch better returns. What if you already have a plan for SIP and you want to compound within the lending portal?

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Let's say you lend Rs. 10,000/- on Sept 2019 for an interest rate of 36%. The tenure of loan is 6 months. You will start receiving your EMIs starting Oct 2019. 

 

 

 

 

 

 

 

 

 

 

 

 

 

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You will receive Rs. 1845/- as monthly EMI for 6 months totalling Rs. 11,075/-

Your interest earned will be Rs. 1075/- ie 10.75% in 6 months or 21.5% in 12 months(1 year)

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The returns plan looks like this

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Rather than spending the monthly EMIs, I would suggest you invest them into lending again. To make it more meaningful, let us assume we get someone to borrow at 27% in October. Since you will lend in October, you will receive this EMI from November  till April 2020

 

 

 

 

 

 

 

 

 

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You will receive a monthly EMI of Rs. 332/-

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Your return plan will now look something like this

 

 

 

 

 

 

 

 

 

 

 

 

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Your total returns in 7 months will be Rs. 11,217/-

By just reinvesting the monthly EMI and waiting for one extra month, you increased your total returns from Rs. 11,075/- to Rs. 11,217/-. That is a Rs. 145/- more or 1.45% extra returns  without any additional investment.(Remember, your initial investment is Rs. 10,000/-)

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Going by this, in November you now get 1845 + 332 = Rs. 2177/- to invest. If you reinvest these returns into lending again at the same rate mentioned above and continue to do so for the subsequent months, your returns table will look as below

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As you can see, the total returns due to re-investing have gone from Rs. 11,072/- to Rs. 12,456/- just by waiting 6 months (or) compounding for 6 more months. That is an extra yearly return of ~3%. The total returns have gone from 21.44% per year to 24.56% by compounding.

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Also note that while we have given the initial investment for a rate of 36%, the subsequent investments were made at a rate of 27%. 

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Risks

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Imagine doing this for higher amounts. The returns are truly great. But what is the trap?

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The traps are the risks of a default. Though the risk of default is minimal considering the background of people allowed to borrow from these platforms, there are chances of defaults. Keep this in mind before going forward. To diversify is one way to reduce the risk of default. Rather than giving huge sum to one person, split it into small sums to lend to huge number of people. That way the risk of default can be minimised.

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Another trap is the government regulation. Government does not allow any individual to have an aggregate exposure of more than Rs.10lakhs in P2P lending. That is the limit. Each of you family members can also be a part of this which can raise the limit to 10 Lakhs times the number of family members.

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Considering 4 family members (Mom, Dad, Yourself, Spouse), the total maximum exposure allowed is Rs. 40,00.000. At a nominal returns of 16%, one can expect upto Rs. 6,40,000/- per year in interests. Make it 20% through compounding and the returns will be Rs. 8,00,000. 

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With a regular returns of approx 16%, P2P lending can give better returns than many mutual funds and the index. This can be added to the list of income sources and to diversify your investments.

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Feel free to comment anything that comes to your  mind

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