How Do P2P Lending Platforms Decide Interest Rates?

P2P lending, short for peer-to-peer lending is a financial service available on online platforms where the borrowers are matched with lenders. This source of funding has been picking up in India. The loans on these platforms are given to individuals and business and are unsecured. Perfect for people looking to get cheaper loans when compared to one from the bank and for lenders that are looking to make extra income with their funds.

The ability to borrow without an intermediary body or a financial institution in the middle is what makes them attractive, especially for those with poor or no credit history whose loan application would be otherwise rejected at a bank. This form of lending is also known as social lending or crowdlending.

How are the interest rates set on these P2P platforms?

There are no fixed interest rates on these unsecured loans and it will vary according to the borrower's ability to repay. The lenders will on P2P platforms carry out risk profiling on the borrower before they agree to loan the money.

A lower risk profile will get a cheaper interest rate when compared to someone who has a higher potential of defaulting on the payment.

Also Read: How To Apply For Loan On P2P Lending Platform?

• The methodolody of rating the risk assessment will vary from platform to platform.
• It is assessed based on their past borrowing/repayment history and diligence in paying their dues and bills on utility services that they use. These factors help ascertain their ability to repay.
• Other factors include sources of income, number of dependents, number of earning members in the family, etc.
• Some fintech companies could go as far as to analyse the candidates shopping behaviour to check their financial discipline.
• Place of residence and employment (rural or urban) is also factored in to understand their financial exposure.
• The lenders and borrowers cannot communicate unless an offer has been made and accepted by the parties.
• A team of underwriters will perform a credit evaluation and an offer will be made to the borrower based on it. The extent of the loan and the interest rate will be offered accordingly.
• The borrower can then negotiate the interest rate, which may be only flexible to a few basis points to a percent.
• Once the offer is accepted by the borrower, they are listed on the platform.
• These online service platforms aim to minimize human interference to come up with an interest rate.
  
• Verification of the financial documents provided by the borrower will, however, be verified by the platform through experts.
• The lenders can pick who they want to fund. While some look for higher interest rates, others focus on the purpose of the loan. The term of the loan is also factored in. This is where the social element comes in unlike that in a financial institution because some lenders look to help individuals with their money if they wish to support their cause.