Peer-to-peer investing, or direct lending, is one of the most modern forms of alternative investment opportunities of the 21st century. While the concept of P2P lending has informally been around for as long as money has existed, it was only in the past two decades that it entered the financial space as a regulated borrowing and investment avenue. The apex Indian bank RBI regulates the P2P lending sector and it has set down guidelines for players to operate within the space. These terms and guidelines aim to streamline the considerably nascent industry and protect both borrowers and investors. Consequently, the liberty and loan diversity this technology-driven investment platform offers, powered by the RBI governance, makes P2P investing quite a lucrative alternative investment opportunity.
1. Passive income
Billionaire investor Warren Buffett once said, “If you do not find a way to make money while you sleep, you will work all your life.” This statement, profound as it is, stresses on the importance of passive income, i.e. income that does not require your active involvement. Since the financial technology-driven P2P platforms verify and ensure the creditworthiness of all borrowers before lending, investors do not have to recheck the same over and over again. This consequently ensures a steady passive income opportunity by way of the interest payments received on the investment.
2. Transparency, Flexibility, and Control Over Investments
As mentioned above, P2P platforms employ financial technology that ensures complete transparency between the involved parties. Lenders have complete access to borrowers’ profiles, their credit rating, and loan information. This information gives them complete transparency, freedom, and control over investments since they can associate the risks and rewards before taking a call. Moreover, by giving complete control of their decisions to investors, P2P lending platforms ensure greater flexibility compared to most investment avenues. P2P investing gives investors the ability to choose between short- and long-term investments.
3. Accessible Investments
P2P lending offers accessible investing opportunities to all, which is unlike the high entry barriers in certain traditional investments. Those interested can start investing with as low as Rs500 (subject to the terms of the P2P platform). This gives small investors the same opportunity as others with deeper pockets to gradually build their portfolios and expand their investments. The accessible nature of these investments also bolsters investor protection as the latter has complete control over their dealings.
4. Diversification
By diversifying across borrower categories as well as investment amounts, lenders can exercise complete control over their P2P investment portfolio. Moreover, with P2P platforms that cater to a wider range of loan requirements, from personal to business to real estate, investors can control exposure based on their risk preferences and investment objectives.
5. High Returns
With the RBI increasing the maximum exposure an investor can have across all P2P platforms to Rs50 lakh, assuming 10% annualised returns, one can stand to earn up to Rs5 lakh in a year. This rate of returns can be potentially higher, up to 12-13%, for fixed-term investments. While stocks are the only other non-traditional assets that offer such high returns, they also have tremendous volatility that is attached to market sentiment.
6. Low platform fees
Apart from the red tape that surrounds traditional lending channels, the cost of borrowing, in the form of processing fees and taxes, is also quite high. P2P investment platforms, on the other hand, charge significantly lower fees than their traditional counterparts. Platforms like 13Karat do not charge any investment fee or commission for deposits, thereby increasing the value proposition for investors.
7. Reduced Risk Factor
Considering that the RBI has capped single lender-borrower exchange to Rs 50,000, risk due to defaults is drastically reduced. This reduced risk factor is further improved by the ability to diversify investments. Investments spread across multiple loans reduce the impact of potential defaults and minimise overall risk exposure.
8. Potential scalability
Considering how the demand for alternative investments, specifically peer-to-peer investing, has amplified over the years, coupled with the fact that the needy will not stop applying for credit, the P2P investing sector holds massive untapped potential. According to a market research report, the Indian P2P lending market size is forecast to reach $10.5 billion by 2026, after growing at a CAGR of 21.6% during the forecast period 2021-2026.
The P2P investment space provides a compelling investment opportunity by ensuring factors such as transparency, accessibility, flexibility, high returns, and reduced risk. As both veteran and new-age investors seek alternative investment avenues to grow their wealth, P2P investing will serve as a unique platform. Investors can make informed decisions after considering these reasons and embark on a rewarding journey towards financial growth through P2P investing.